The rupee's new depths against the US dollar: What's going on?

India’s fundamentals are fine and it is mostly external factors that have weakened its currency

- MADAN SABNAVIS

When the rupee went to 87 units against the dollar, the market call was that it would cross 88.

Once this mark was reached, the call was 89, with some even speaking of the rupee hitting 90. Several explanations were offered. But can one really make an informed guess on where the rupee goes? The best response is a shoulder shrug, as the present situation is quite different from earlier moments when there was reason to turn bearish.

A key driver of the rupee is the market's perception of what the Reserve Bank of India (RBI) may do. Whenever the rupee drops without a convincing explanation, the market turns to RBI for direction. RBI has maintained that it does not target any specific level, as the exchange rate is market-determined. But in case there is too much noise, RBI starts buying or selling dollars.

The market reaction is especially predictable when there is no economic rationale for movements. Let's suppose the rupee is at 88.75 against the dollar. The market believes that if RBI does not intervene to prevent a slide, it's probably pleased with it, thus triggering a self-fulfilling cycle of decline. Exporters hold back on converting their dollar earnings, hoping to gain if it goes to 89 or 90. Importers, on the other hand, rush to buy dollars; else their costs would rise. This worsens the situation, with the demand for dollars exceeding its supply and weakening the rupee even further. In 2025 so far, there has been less RBI intervention than usual, which means the exchange has been more closely market-determined.