Indian rupee posts best week in seven months, fundamentals key for lasting turnaround

MUMBAI: The Indian rupee experienced its largest weekly gain in seven months, climbing 2% to reach 94.96 per dollar, according to market data. Analysts attribute the surge to policy measures implemented to bolster the currency's strength, although they believe lasting improvement will depend on addressing underlying issues. The Indian rupee rebounded from a record low of 96.96 against the dollar seen last week.

The Indian government has taken steps to support the rupee by redirecting oil dollar demand away from the market, raising the cost of purchasing protection against a weaker rupee and lowering the limit for dollar purchases without proper documentation to $5 million. These measures are expected to ease depreciation pressure in the near to medium term, but sustained recovery would necessitate a more comprehensive shift in conditions.

HSBC's head of Asia FX research, Joey Chew, noted that unless oil prices plummet, the USD-INR will likely continue to face upward pressure in the long run due to factors such as India's current account deficit, inflation differential, insufficient portfolio inflows, and the Reserve Bank of India's short FX forward position. However, Chew anticipates the rupee to weaken to 96 by the end of the year and 98 by the end of 2027.

The Reserve Bank of India has utilized approximately half of the over $140 billion drawn from special measures to boost its foreign exchange reserves, with net forward dollar liabilities standing at $200 billion as of August. India's merchandise trade deficit expanded to $30.21 billion in September, up from $26.8 billion in August.

Investors have expressed concerns that frequent changes in foreign exchange regulations to shore up the rupee could undermine policy predictability and diminish currency market liquidity. The dollar index, in contrast, experienced a slight decline of 0.3% to 101.7, while most Asian currencies saw gains ranging from 0.1% to 0.7%.