Indian Rupee Under Strain as Importer Demand and Foreign Outflows Weigh on Currency

On Thursday, the Indian rupee edged lower as the recent rally in Asian currencies took a pause, while forward premiums increased following the release of Federal Reserve minutes and downward revisions to U.S. payroll figures.

At 10:36 a.m. IST, the rupee was trading at 83.9425 against the U.S. dollar, slightly down from 83.9225 in the previous session. Despite a brief period of relief in recent days, the rupee has been under pressure, largely due to ongoing demand from importers.

This persistent dollar demand is putting significant strain on the rupee. Additionally, foreign outflows from Indian equities are contributing to its challenges, with overseas investors withdrawing over $2 billion from Indian equities so far this month, a stark contrast to the nearly $4 billion of inflows seen in July.

The Federal Reserve’s minutes from its July 30-31 meeting reinforced expectations of interest rate cuts at the upcoming September meeting. Downward revisions to U.S. payrolls further strengthened the likelihood of a rate cut in September, with the possibility of additional cuts later this year. The odds of a larger 50 basis point rate cut next month have also increased slightly.

Despite these developments, Asian currencies showed weakness, likely taking a breather after their recent gains. In response to the anticipated Fed rate cuts, the dollar/rupee forward premiums rose, with the 1-year implied yield reaching its highest level since May 2023, up by 25 basis points this month.

This market update underscores the ongoing pressures on the Indian rupee, influenced by both domestic factors such as import demand and foreign investment trends, as well as the broader global economic environment.