Rupee may decline further as RBI has little elbow space

The local currency market is bracing for more weakness in the coming weeks, after the rupee sharply slid to a record low of 89.41 against the US dollar within the last hour of trade on Friday.

- Subhana Shaikh

While traders expect the Reserve Bank of India (RBI) to step in early next week to push the pair away from the psychologically important 90-mark, economists and treasury officials warn that the broader trend of depreciation remains intact. The 90-mark doesn’t seem quite distant now, in the absence of a trade deal.

Market participants attributed Friday's fall to a combination of factors, including the RBI's absence after weeks of defending the 88.8-89 band, cascading stop-loss triggers, persistent US dollar demand from importers, and growing uncertainty over the delayed India-US trade deal.

Comments from the RBI governor that the rupee has no “specific target” and its weakness reflects global dollar strength and geopolitical tensions only added to the nervousness.

The move was also accompanied by a softening in US 10-year treasury yields from 4.15% to below 4.05% because of mixed US labour market data, which lowered hopes of another rate cut by the US Federal Reserve to about 40%, strengthening the dollar.

Despite strong fundamentals of the domestic economy and a weaker dollar, the Indian rupee has depreciated 4.4% since April.

"I don’t think the pace of the depreciation story is over," said Gaura Sengupta, chief economist at IDFC First Bank.