Forex traders attributed the sharp depreciation to multiple factors, including recent US policy changes on visa fees and ongoing trade tensions, which have triggered significant foreign capital outflows from Indian markets.
Sharp Decline Throughout Trading
The domestic currency opened weak at 88.41 against the dollar on Tuesday and continued to slide throughout the session. It eventually tumbled to a record intraday low of 88.76, marking a steep decline of 48 paise from Monday's closing of 88.28.
This new low surpasses the previous record of 88.44 hit earlier in September, when the rupee first showed vulnerability to U.S. tariff pressures. The currency's decline reflects mounting strain on Asia's third-largest economy as it navigates challenging global trade conditions.
Key Factors Behind the Rupee's Weakness
US Policy Changes Rattle Markets
Market experts identified recent US policy decisions as significant contributors to the rupee's decline. Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors LLP, highlighted that "persistent headwinds like enhanced US tariffs on Indian goods as well as US Visa fees of $100,000 on H-1B visas has [sic] the rupee lurking towards the all-time low".
The H-1B visa fee hike has sparked particular concern among forex traders, who worry about its potential impact on remittance flows and equity outflows from India's crucial IT sector.
Foreign Investor Withdrawal
The currency weakness coincides with substantial foreign capital outflow from Indian markets. Foreign portfolio investors (FPIs) sold Indian shares worth ₹2,910 crore just on Monday, continuing a trend that has seen a net withdrawal of $11.7 billion from Indian debt and equity markets so far this year.
"Equity markets reflected the nervous mood, with investors pulling out ₹2,910 crore on Monday. The outflow underscores how global policy shocks can quickly translate into pressure on India's financial markets," said CR Forex Advisors MD Amit Pabari.
Broader Economic Pressures
- Global risk aversion has amplified the rupee's depreciation
- Trade policy uncertainty continues to cloud the currency's outlook
- The dollar index was trading 0.04% higher at 97.38, adding to pressure on emerging market currencies
- Brent crude prices fell 0.51% to $66.23 per barrel
RBI's Response and Market Outlook
The Reserve Bank of India has frequently intervened to temper the pace of the rupee's decline. However, recent interventions have been limited, with the RBI allowing greater volatility and possible further declines in the rupee.
Bankers indicate that these interventions are not aimed at defending any particular currency level but rather at keeping the slide "measured" and preventing unease among corporates and investors.
Implications for the Indian Economy
The rupee's record low means imports will become more expensive, potentially increasing costs for Indian businesses and consumers. For Indian students abroad and travelers, the weakening currency makes international education and travel more costly, as more rupees are required to purchase each US dollar.
With the Federal Reserve expected to potentially cut rates by 25 basis points at its October meeting, some relief might be on the horizon. However, near-term weakness in the rupee is likely to persist considering the impact of the U.S. tariffs on labor-intensive sectors.
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