What’s going on here?
The Indian rupee is under pressure and expected to hit a record low of around 84 against the US dollar due to heightened demand in the non-deliverable forward market and concerns over the yen carry trade.
What does this mean?
Non-deliverable forwards indicate the rupee will open between 83.97-83.99 per dollar, slipping past Monday’s close of 83.8450. The 1-month dollar/rupee NDF spiked to 84.25 overnight amid worries about the yen carry trade unwinding. While the Reserve Bank of India (RBI) did intervene in the onshore over-the-counter (OTC) market to curb rupee losses, the RBI’s caution in the NDF market is causing market jitters. Despite this, RBI has previously intervened in the NDF market to stabilize rates before the OTC market’s open – a possibility for today as well.
Why should I care?
For markets: Navigating the waters of uncertainty.
The rupee’s drop signals broader market concerns. Although Asian shares have rebounded from Monday’s selloff, with Japan’s equity gauge rising and US equity futures gaining, currency instability remains a worry. Encouraging comments from a Federal Reserve official and strong US services data have boosted risk assets, implying ongoing US economic growth despite a shaky July jobs report. Investors have also trimmed their expectations for Federal Reserve rate cuts to 110 basis points this year from an earlier 125 bps.
The bigger picture: Global economic shifts on the horizon.
The rupee’s pressure ties into wider global economic themes like the yen carry trade and Federal Reserve policies. Robust US economic indicators, such as the latest services report, suggest sustained expansion and job creation, although inflation concerns persist. Data from the National Securities Depository Limited shows foreign investors sold $402.1 million in Indian shares but bought $230.4 million in Indian bonds on August 2. These mixed signals point to a complex global economic landscape requiring careful navigation by investors and policymakers.
