The Indian rupee hit a record low against the U.S. dollar, closing at 83.34 on Friday, down 0.07% from the previous day. This marks the lowest closing level and a 0.2% weekly decline. The rupee touched an intraday low of 83.42, breaching its previous record set on November 1. The pressure on the currency intensified due to an outage in the interbank order matching system. Asian currencies, including the Korean won, weakened as U.S. Treasury yields rebounded, with the 10-year yield reaching 4.64%. The decline in the rupee is expected to be gradual, with traders anticipating intermittent intervention from the Reserve Bank of India to prevent sharp declines.

Key Factors Driving Recent Rupee Depreciation

1. Strong US Dollar and Elevated Yields

The US dollar's continuous strength, marking its longest winning streak in 15 months, alongside a two-month high against major peers, contributes to the rupee's decline. With the 10-year US Treasury yield reaching 4.25%, economic resilience and potential Fed hawkishness maintain upward pressure.

2. Domestic Bond Yields and Global Economic Concerns

Indian benchmark bond yields, notably the 7.26% 2033 bond, touch a four-month high at 7.26%. The fall in China's yuan, down 0.6% this week, amplifies pressure on the rupee. Concerns over China's economic recovery and a property sector debt crisis contribute to global economic uncertainty.

3. CPI Inflation and Monetary Policy Outlook

India's retail inflation hits a 15-month peak at 7.44% in July, surpassing the RBI's comfort band. High inflation raises expectations of a prolonged elevated interest rate, impacting the rupee. Rate cut projections are pushed to FY25, affecting market sentiments.

4. Interest Rate Dynamics and Fed Expectations

Fears of a prolonged elevation in US interest rates emerge as robust economic data signals resilience. The US Federal Reserve's potential interest rate hikes and concerns over a slowdown in the Chinese economy contribute to elevated yields and impact the rupee.

5. Foreign Institutional Investors (FII) Selling

FIIs net sell Indian shares worth ₹10,658 crore in the cash market, intensifying the rupee's fall. The anticipation of limited foreign investments due to escalating US bond yields further influences market dynamics.

6. Future Outlook and Potential Support Levels

Despite RBI's active FX intervention, the rupee faces challenges. Immediate support is anticipated at 82.90 - 82.50 levels. A critical level to monitor is 83.30; a breach could lead to further depreciation towards 83.75 - 84.20 levels in the next six months.

7. Geopolitical and Economic Uncertainties

Geopolitical tensions and uncertainties in the global economic landscape contribute to the rupee's vulnerability. Ongoing developments, especially regarding China's economic health, will shape future market movements.

Also read: India’s Best Pet Insurance Policies 2023

The Bottom Line

The recent rupee depreciation is a result of a complex interplay of global factors, including strong USD, elevated yields, inflation concerns, and FII selling. As the market navigates uncertainties, particularly tied to global economic conditions and central bank policies, a dynamic and vigilant approach is essential for investors and policymakers alike.

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