India’s Economic Boom Can’t Stop the Rupee’s Relentless Decline – What’s Really Going On?
India’s economy is firing on all cylinders—so why is its currency stuck in reverse gear?
The rupee’s slump defies textbook economics. GDP growth? Check. Stock market highs? Check. Yet the currency keeps getting hammered. Someone’s not telling us the whole story.
Behind the curtain: The dirty secret of emerging markets. Hot money flows and central bank bandaids can’t hide structural cracks. Meanwhile, crypto traders are laughing all the way to their decentralized banks.
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No official target, but plenty of action
The RBI says it doesn’t target any specific exchange rate. But its constant moves to cap both gains and losses have happened right as the currency’s three-month implied volatility fell to around 3.4 percent. That’s nearly half what it was at the peak in May.
Madhavankutty G is chief economist at Canara Bank. He explains “the RBI doesn’t like volatility, on either side. They’ve made it clear excessive appreciation could hurt exporters’ margins … so they’ll try to smooth movements both ways.”
India’s still sitting on huge foreign exchange reserves. Those act as a safety net. RBI data shows the reserves fell $6.92 billion to $695.36 billion as of October 24.
The latest pushback seems aimed at countering growing bearish bets on the rupee. But analysts warn that if the heavy intervention continues, it might actually scare away longer-term foreign money.
Investors staying away despite growth
Bhansali at Finrex puts it bluntly. “Things will only improve when foreign investors start believing in the India story, which they are still not believing despite the fact we have a great GDP number.”
And that GDP number is actually pretty impressive. Asia’s third-largest economy grew a strong 7.8 percent between April and June. Problem is, economists are skeptical that pace will last.
The bigger issue? Foreign investors have yanked around $17 billion out of equities and nearly $1 billion from debt under the voluntary retention route this year. That’s a program specifically meant to pull in long-term overseas cash into the bond market.
The poll’s forecasts aren’t exactly exciting. The rupee’s expected to gain just 0.4 percent from where it is now, reaching $88.25 per by end-January. It’s then forecast at 88.08 by end-April and 88.50 in a year’s time.
FX analysts have usually been bullish on the rupee across all time horizons. But regional currency pressures continue to weigh, especially with the dollar staying strong globally.
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