Rupee Downslide Continues, Breaches 86/$ Mark this Week

Driven down by a strong US currency amid uncertain global indications, the rupee's slump continued for the second consecutive session on Monday, losing 27 paise to hit a new lifetime low of 86.31 against the US dollar.

According to an analysis made by The Times of India, The Reserve Bank of India (RBI) faces a major challenge as the rupee is set to breach the 86-mark this week with the dollar continuing to strengthen against most currencies. This would hinder attempts to use lower interest rates to boost GDP growth, which is predicted to drop to 6.4% in FY25.

“The rupee has continued to touch lifetime lows in each of the last few sessions. Pressure on the currency has stemmed from a stronger dollar and is further compounded by patchy FPI inflows. The pressure on the rupee is likely to persist in the near term as uncertainty over US rates and government policies is expected to keep the dollar strong.” - Aditi Gupta (Economist at Bank of Baroda)

Due to tight rupee liquidity conditions, the timing for a 50 basis point repo rate drop has been rescheduled from February-April to April-June, according to a Stanchart analysis co-authored by Anubhuti Sahay, quoted by The Times of India.

At the February MPC meeting, Stanchart anticipates a 50 basis point reduction in the cash reserve ratio (CRR), citing concerns about the liquidity gap getting worse. If nothing is done, the headline liquidity shortfall is predicted to rise to between ₹1.9 and ₹2.5 lakh crore by the end of FY25.

Additionally, the report reduces its projection for the dollar-rupee by 175 paise to 86.25 by March 2025, citing the RBI's heightened tolerance for a higher currency and worse balance of payments flows as the reasons for the adjustment.