Rupee hits all-time low; check out four key factors leading to INR depreciation

The rupee declined by 2 paise to reach a historic low of 84.13 against the US dollar during early trading on Tuesday, in anticipation of the US presidential election. Forex traders indicated that the markets are preparing for possible fluctuations in the coming days, particularly with the Federal Reserve's monetary policy announcement set for later this week.

According to a PTI news report, the rupee started at 84.13 against the greenback in the interbank foreign exchange market, marking a decline of 2 paise from its previous close. On Monday, the rupee dropped by 4 paise to end at a historic low of 84.11 against the US dollar. The rupee ended at a historic low on Monday and began the day at a new low of 84.13 as US elections created turbulence in stock markets alongside ongoing foreign fund outflows.

"We expect a rupee to remain volatile this week amid volatility in the dollar index and volatility in the domestic equity markets and a pair could trade in the range of 83.5500-84.7000," said Rahul Kalantri, VP, Mehta Equities Ltd.

The routine actions taken by the Reserve Bank of India (RBI), like those on Monday, have prevented significant drops in the rupee, even amid significant outflows from domestic stocks and high US bond yields, as noted by market analysts.

On Monday, foreign institutional investors (FIIs) sold Indian shares worth ₹4,329.79 crore, while domestic institutional investors (DIIs) bought shares totaling ₹2,936.08 crore, according to exchange data.

“Untill FII keep selling India rupee will be under pressure and this would also bring down equities. At this juncture Investors should wait and watch for some time till the dust settles,” added Kalantri.

Further, according to reports from Reuters, RBI is well-prepared to handle increased market volatility and pressure on the rupee if Republican candidate Donald Trump wins the US presidential election next week.

Additionally, considering the current state of the equity market, analysts believe that India underperforming its global peers due to excess valuation. The domestic benchmark indices, have declined roughly 8% from their peak values reached in late September.

Four key factors that led to Rupee hitting a record low

Persistent foreign fund outflows

Heavy selling by FIIs, driven by a strategic shift towards China, has impacted the appeal of the domestic market, which was already facing difficulties due to weak corporate earnings and elevated valuations.

According to Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities, the Indian rupee is into the selling mode right now because of mainly one reason: FII FPI is pulling money out of the Indian markets due to the lucrative situations in the markets of Chinese economics. Now the Indian rupee is navigating on the lower side below 84 currently, and if it holds onto this lower side trajectory than the levels of 84.35, 84.50 can be seen into the near term.

US presidential election

The Indian stock market has witnessed increased volatility, mainly due to uncertainty surrounding the competitive US presidential election, in which Republican candidate Donald Trump and Democrat Kamala Harris are closely matched.

“The rupee is expected to remain volatile, with the US election results due on the evening of November 6, adding potential market uncertainty,” added Trivedi.

Earnings downgrade

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, pointed out that India's poor performance is noteworthy: while the S&P 500 has risen by 20.45% year-to-date, the Nifty 50 has only increased by 10.36% YTD. It is evident that domestic challenges are negatively impacting the markets. With approximately two-thirds of Nifty 50 companies failing to meet their earnings projections in Q2, the earnings forecast for Nifty 50 for FY25 has been significantly downgraded to below 10%, down from the previous consensus of 15%. Given this type of earnings reduction, maintaining the current valuation levels will be challenging.

Ongoing geopolitical tensions

According to ANI, a Bank of Baroda report stated that geopolitical factors, especially the US election developments and persistent tensions in the Middle East, coupled with domestic inflation patterns, will significantly influence the trajectory of the rupee in the upcoming period.

Additionally, market analysts believe that ongoing geopolitical tensions have led to delays in an increase in OPEC+ oil production, which has resulted in a rise in oil prices.

“Rupee touched its weakest level on record as persistent outflows from local stocks blunted the impact of a weaker dollar. Crude oil prices also recovered and also pushed a rupee lower,” added Rahul Kalantri.

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