Rupee falls below 90 against dollar due to tariffs and capital outflows
Mumbai: The Indian rupee fell below the crucial psychological level of 90 against the dollar on Wednesday, extending its eight-month decline as dollar outflows for trade and investment and companies' rush to avoid further weakness severely impacted the currency.
The rupee is one of Asia's worst performers, falling 5% against the dollar so far this year as heavy U.S. tariffs of up to 50% on Indian goods have reduced exports to its largest market, dimming the shine of its equities for foreign investors.
It took a little less than a year for the rupee to fall from 85 to 90, or less than half the time it took to fall from 80 to 85.
India is one of the worst-hit markets globally in terms of portfolio outflows, with foreign investors net selling nearly $17 billion of its stocks so far this year.
Weakness in portfolio investment has been accompanied by a decline in foreign direct investment, further exacerbating the pressure.
Gross investment flows into India have been steadily rising, reaching $6.6 billion in September, but significant exits from its booming IPO market have led to net outflows as private equity and venture capital firms cash out from earlier investments.
The central bank, the Reserve Bank of India, said in its November bulletin that net foreign direct investment (FDI) turned negative for the second consecutive month in September, driven by an increase in outward FDI and a return of investment.
Heavy US tariffs and a sharp surge in gold imports pushed India's merchandise trade deficit to its highest ever in October.
Additionally, dollar flows from domestic firms' foreign borrowings and non-resident Indian deposits in banks have slowed.
Bankers and traders say each phase of decline—including Wednesday's breach of the 90 level—has triggered fresh dollar demand, particularly from importers, while exporters are holding back dollar sales.
This imbalance has left the rupee vulnerable to a lack of adequate capital inflows.
"If left alone, the Indian rupee is a shock absorber for the economy and an automatic stabilizer for external finance," HSBC economists said in a note. "A gradually weakening INR is the best shock absorber for higher tariffs."
Months of uncertainty surrounding trade talks between New Delhi and Washington have also disrupted India's FX hedging landscape, leading to increased importer hedging while exporters remained hesitant, forcing the RBI to absorb the pressure on the currency.
While the RBI has taken intermittent steps to slow the depreciation, bankers said the scale and persistence of dollar demand from outflows and hedging by importers is weighing on the currency.
The RBI's efforts to strengthen the rupee are reflected in a decline in foreign exchange reserves and a 5-month high of $63.4 billion in short U.S. dollar positions in the FX forward market.
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