📰The Rupee Is Weakening, Fast

Hello. The Indian rupee has reached a new low, breaching the soft red line of 84 USD/INR exchange rate once again. We'll explore the reasons behind this and what it reveals about India's economy, and then close with Gupshup, a roundup of the most important headlines.

BTW: India was the first country to create cotton textiles. How long ago? (Answer at bottom)

Markets

Read here for an appendix on the above.

Analysis

The Rupee Is Weakening, Fast

The Indian rupee has reached a new low, breaching the soft red line of 84 USD/INR exchange rate once again. On Friday, the rupee dropped as much as 0.1 percent to a record low of 84.0975. Offshore investors have pulled out $5.7 billion from Indian stocks in October alone, while bonds saw outflows of $125 million, according to Bloomberg. These foreign portfolio outflows have significantly contributed to the rupee's fall. The outflows are driven by global economic conditions favoring a strong dollar, and a shift in the Reserve Bank of India's policy stance.

Traders had been closely watching the 84-level, anticipating potential intervention from the RBI. However, while the central bank intervened around 83.98 and 83.99 levels, the scale of outflows—particularly from equities—has been too strong for modest interventions to halt the decline.

The RBI has maintained a focus on currency stability, intervening selectively to prevent excessive volatility. Its recent shift from a hawkish to a neutral policy stance on interest rates, which Samosa Capital covered on Wednesday, has fueled speculation that India may be on a path toward rate cuts. Michael Wan, a senior currency analyst at MUFG Bank, commented that as long as the rupee’s depreciation remains gradual, the RBI may tolerate it to retain foreign exchange competitiveness.

As of October 4, India’s foreign-exchange reserves stood at $701.2 billion, reflecting the RBI's capacity to manage currency fluctuations. However, traders expect continued near-term volatility, as the rupee remains under pressure from global and domestic factors.

Global Forces and the Strong Dollar

The broader macroeconomic environment has been unfavorable for emerging market currencies like the rupee. Global investors are gravitating toward US assets, drawn by higher yields and the Federal Reserve’s commitment to a restrictive monetary policy. Core CPI in the US rose by 0.3 percent in the latest report, exceeding expectations, and reinforcing the narrative of a strong dollar.

Capital Outflows: Equities and Bonds

In addition to global factors, Indian equities have become less attractive to foreign investors, driven by concerns over high valuations and slowing corporate earnings growth. As of September 2024, the Nifty 50’s price-to-earnings (P/E) ratio stood at 25x, significantly above its historical average of 20x. With corporate earnings in Q2 2024 falling short of expectations—some sectors, such as consumer goods, posting only single-digit growth—foreign investors are reassessing their positions.

In September alone, foreign portfolio investors sold $2.5 billion worth of Indian equities. The stretched valuations, alongside concerns about the sustainability of corporate earnings growth, have caused many to seek safer assets globally.

The bond market tells a similar story. Indian 10-year government bond yields, hovering at around 6.75 percent, are losing appeal compared to US Treasuries, where yields remain high even with the prospect of rate cuts. The narrowing yield differential, now around 250 basis points, is insufficient for many investors, particularly given the additional currency risk. FPIs have offloaded $10.5 billion worth of Indian bonds in 2024, further compounding pressure on the rupee.

Widening Current Account Deficit

Another critical factor is India’s growing current account deficit (CAD), which is putting structural pressure on the rupee. India’s CAD is expected to reach $85 billion (2.3 percent of GDP) in FY24, up from 1.5 percent of GDP in FY23. The primary driver behind this increase is the country’s reliance on crude oil imports, which account for nearly 30 percent of total imports. With oil prices elevated around $78 per barrel due to ongoing geopolitical tensions, the cost of energy imports has surged, further widening the CAD.

A larger CAD translates to higher demand for foreign currency, as India needs more dollars to pay for its imports, putting additional downward pressure on the rupee. Global investors, wary of the widening deficit, fear that the rupee’s depreciation could accelerate, prompting further capital outflows.

Looking Ahead

While the rupee’s weakness has been driven by a confluence of global and domestic factors, its future trajectory will depend largely on external economic developments. The stabilization of US inflation and a reversal of capital outflows from Indian markets could ease some of the pressure on the currency. However, with global interest rates and India’s current account deficit still presenting challenges, the rupee is likely to remain under pressure for the foreseeable future.

For now, the 84-mark represents a key threshold for traders and policymakers alike. The Reserve Bank of India's approach to managing currency stability will play a critical role in determining whether the rupee can stabilize or continue its downward trend.

Macro

• RBI quarterly survey finds inflation expectations easing. The survey, which took place between September 1-10 with 6,000 respondents in 19 major cities, shows households expecting inflation to reduce by 10 basis points now, and 20 basis points over the next three months. (BBG)

• RBI warns shadow banks to increase creditworthiness checks of loans or fear regulatory action. Governor Das agrees most banks are safe, and that there are some “outliers” that put larger financial systems at risk. Shadow banks, which are non-banking finance companies offering credit lines and loans, have exploded in growth over the last few years. (BBG)

• Indian families are pouring life savings into IPOs, causing concern for regulators. Monthly contributions to Indian mutual funds are at a record high — liquidity has little place to go other new shares in the booming stock market, while India is home to the most IPOs globally. Indian IPOs experience massive pops: IPO shares rise 39 percent on their first trading day, and 42 percent in their first month.

Equities

• Byju’s, an Indian education start-up, denies it tried to transfer $533 million (₹44.8 billion) away from U.S. lenders. Three years ago, the company received a $1.2 billion (₹100.8 billion) loan for international expansion, of which some funds were moved to offshore accounts linked to founder Byju Raveendran; lenders have been trying to track the money down for a year. Last month (Sept 2024), Byju’s defaulted on $1.5 billion (₹125.9 billion) in U.S. debt. The company, once valued at $22 billion (₹1.8 trillion), has fallen to a $200 million (₹16.8 billion) valuation. (BBG)

• Jindal Steel and Power, India's third-largest private steel producer, is backing out of a deal to operate an oil-processing facility for Venezuela's state-owned crude producer. The $300 million (₹25.2 billion) deal would have been Jinda’s first time entering the oil business, but the deal ultimately collapsed over disagreements on control of the operation. (BBG)

• Hyundai plans to invest $3.8 billion (₹319 billion) in more plants in India over the next 10 years. The company will have 1.1 million annual car production from India to boost international and rural Indian sales. (Livemint) 

• Indian funds vacuumed $1 billion (₹84 billion) of equities per day for a three-day period ending Tuesday (October 8). Portfolio managers smartly took advantage of suppressed valuations after international investors rotated money out of India and into China. (BBG)

• Ola Electric’s post-IPO hype flattens with a 9.6 percent drop to its lowest share price since its public offering. Falling valuations come after customers voiced viral complaints against the company’s electric scooters. Ola’s market share has fallen to a 16-month low of 27 percent. (BBG)

Alts

• FTSE Russell will add India to its emerging market government bond index in September 2025. Indian bonds will make up 9.35 percent of the index by market value, becoming the second-largest component after China. It will be the third index including Indian debt after JPMorgan and Bloomberg Index Services. (Business Standard)

Policy

• An unexpected win in state elections in Haryana, a small northern agrarian state, for Narendra Modi’s BJP, solidifies his upward momentum. The BJP was expected to be weakened after tear-gas shells were used to squash pro-farmer protests and youth unemployment remains high. (Al Jazeera)

Oh, and archeologists have found evidence that India first started producing and selling cotton textiles as early as 5000 BCE.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 84.10 Indian Rupee