The Indian rupee faces a slow decline due to oil and China rotation risks

(Bloomberg) — The Indian rupee, which fell above 84 against the dollar this month and hit a new record low, is on a downward trend as geopolitical risks drive up oil prices and outflows in a shift toward China local shares.

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Barclays Plc. points to record high gold prices, a stronger dollar and increased risk aversion as reasons the central bank could allow the rupee to fall. The lender forecasts a gradual decline in the currency towards 84.40 per dollar, while research firm QuantEco Research is targeting 84.50 and Kotak Mahindra Bank Ltd. expected to fall to 84.25.

“Global headwinds due to geopolitical risks and a slower pace of monetary easing in the US amid robust data are likely to weigh on the rupee in the near term,” said Upasna Bhardwaj, chief economist at Kotak in Mumbai. Foreign portfolio outflows from India and other emerging markets reflect this uncertainty as money flows to China in hopes of the country's recovery, she said.

Global funds pulled $9.1 billion from Indian stocks this month amid high valuations and a shift toward China. Even India's index-eligible bonds, which have seen about $2 billion in inflows every month since they were added to global bond indices in June, recorded two straight weeks of outflows this month.

The rupee fell to a record low of around 84.10 per dollar in early October and closed at 84.07 on Monday. Barclays strategists led by Lemon Zhang expect the Reserve Bank of India to allow the rupee to fall above 84 on the back of a sharp rise in the currency's nominal effective exchange rate since late September.

Traders said the central bank had defended the 84 mark for two months, armed with nearly $700 billion in foreign reserves. The authority's tight grip on the currency has kept speculators at bay, made sharp devaluation unlikely and made the rupee one of the most stable among emerging markets.

This strategy has seen the rupee outperform its Asian counterparts during periods of dollar strength and underperform when the greenback weakened.

“We don't control the exchange rate – the rupee is depreciating against the dollar and we buy dollars whenever we get the opportunity,” Governor Shaktikanta Das said at a Bloomberg event on Friday.

Higher US yields ahead of next month's US elections and a possible slowdown in debt flows could add pressure to the rupee, according to Elara Securities.

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“We see the rupee gradually moving into a zone where risks are becoming more evident compared to a quarter or two ago,” Garima Kapoor, economist at Elara, wrote in a note. The company cut its rupee forecast for fiscal 2025 to 83.5 from 82.8 previously, with downside risks.

– With support from Ronojoy Mazumdar.

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