Why India’s rupee is the worst performer in the Asian market against the dollar

 

The Indian rupee's underperformance against the dollar in August is primarily due to a combination of factors:

1. Reserve Bank of India (RBI) Intervention:

• The RBI has been actively intervening in the foreign exchange market to support the rupee, selling dollars and buying rupees. This intervention has helped limit the rupee's depreciation.
• However, this intervention has also prevented the rupee from appreciating as much as other Asian currencies, especially during periods of dollar weakness.

2. Foreign Portfolio Investor (FPI) Outflows:

• FPIs have been pulling out funds from Indian equities, leading to increased demand for dollars and putting downward pressure on the rupee.

3. Trade Deficit:

• India's trade deficit, which is the difference between imports and exports, has been widening. This means India needs to buy more dollars to pay for imports, putting downward pressure on the rupee.

4. Dollar Demand from Importers:

• Importers in India need dollars to pay for goods and services imported from other countries. This demand for dollars can put downward pressure on the rupee.

5. Carry Trade Unwinding:

• Earlier in the month, there was some unwinding of carry trades, where investors borrow in low-interest rate currencies (like the Japanese yen) and invest in higher-yielding currencies (like the Indian rupee). This unwinding led to increased selling of the rupee.

6. Expectations of US Rate Cuts:

• Other Asian currencies have appreciated against the dollar due to expectations that the US Federal Reserve will cut interest rates. However, the RBI's intervention has prevented the rupee from appreciating as much.

Overall, the RBI's intervention, combined with foreign portfolio investor outflows, trade deficit, and dollar demand from importers, have all contributed to the rupee's underperformance against the dollar in August