Indian Rupee Plunges to 87.33 Against US Dollar Amid Weak Yuan and NDF Maturities

The Indian rupee witnessed its steepest single-day fall in two weeks, depreciating by 0.5% to close at 87.33 per US dollar on Monday. The decline was primarily triggered by the maturity of non-deliverable forwards (NDF) positions, coupled with weakness in the Chinese yuan and global risk aversion.

This marks yet another setback for the rupee, which continues to be the worst-performing Asian currency of 2024, impacted by foreign portfolio outflows, trade war concerns, and shifting global economic conditions.

Drivers Behind the Rupee’s Sharp Decline

1. Non-Deliverable Forwards (NDF) Market Maturities Driving Dollar Demand

The rupee faced selling pressure due to a surge in dollar bids from foreign banks, which were covering their positions in the NDF market.

• A foreign exchange salesperson at a large international bank noted, “Several NDF maturities are scheduled this week, which could keep USD/INR well bid.”
• Traders expect continued volatility in the forex market, with further NDF maturities potentially putting more pressure on the rupee.

2. Weakness in the Chinese Yuan Weighing on Regional Currencies

• The Chinese yuan, a major driver of emerging market sentiment, has remained under pressure, indirectly impacting the rupee’s performance.
• A weaker yuan tends to reduce the competitiveness of Indian exports while also influencing investor sentiment towards Asian currencies.
• The yuan’s decline raises concerns about China’s economic health, which could affect India’s trade outlook in the coming months.

3. Global Risk-Off Sentiment Boosting Dollar Demand

• Global investors are turning towards safe-haven assets amid rising concerns over an economic slowdown in the United States.
• US equity futures fell, and safe-haven currencies such as the Japanese yen and Swiss franc gained strength, reflecting cautious investor sentiment.
• Market participants are closely monitoring signals from the Federal Reserve on potential interest rate changes, which could further impact emerging market currencies like the rupee.

4. Persistent Foreign Portfolio Outflows

• Foreign institutional investors (FIIs) continue to pull capital from Indian equity and debt markets, leading to downward pressure on the rupee.
• Rising US bond yields have attracted investors away from emerging markets, including India.
• According to exchange data, FII outflows have remained elevated in recent weeks, contributing to the rupee’s depreciation.

5. US Trade Tariff Concerns Adding to Market Uncertainty

• The looming threat of reciprocal US trade tariffs has spurred concerns among currency traders.
• The US has announced plans to impose tariffs on aluminium and steel imports later this week, with additional reciprocal tariffs expected in early April.
• A note from ING Bank warned, “The market remains concerned about the possibility of extensive US trade tariffs, which could create further volatility in emerging market currencies.”

Market Reaction and Economic Outlook

Dollar-Rupee Forward Premiums Surge

• The 1-year dollar-rupee forward implied yield climbed 3 basis points to 2.14%, reflecting expectations of continued currency volatility.
• Traders are awaiting US and Indian inflation data, due for release on Wednesday, which could provide insights into future policy rate adjustments.

Intervention by Indian Banks Limiting Further Losses

• Despite the downward pressure, two large private banks were reported to have sold US dollars, providing some support to the rupee.
• A trader at a state-run bank mentioned, “While the rupee was under pressure throughout the day, dollar sales by major banks helped limit losses to some extent.”

Rupee’s Performance in the Asian Currency Market

• Most Asian currencies traded lower in the range of 0.1% to 0.3%, as global economic concerns weighed on emerging market assets.
• The US dollar index remained slightly higher at 103.7, recovering from last week’s four-month low.
• Investors are closely watching China’s economic data and US monetary policy decisions, which could dictate further currency movements.