Rupee hits all-time low of 86/USD. Will it decline further?

On Monday, the Indian rupee hit an all-time low against the US dollar, surpassing the 86 level. The rupee declined 0.4% to 86.39 per dollar, reflecting the overall slump in Asian currencies.

The significant decrease followed a stronger-than-expected US employment data, which boosted the dollar and weighed on developing market currencies, notably the rupee. The US nonfarm payrolls statistics showed that 256,000 jobs were gained last month, considerably above predictions of 160,000.Furthermore, excellent performance in the US services and industrial sectors demonstrated the strength of the world’s largest economy.

The new data dashed prospects of an early rate decrease by the Federal Reserve, boosting the dollar and depressing the rupee. Another reason driving the rupee’s decline is continual selling by foreign institutional investors. It has worsened the rupee’s depreciation.
It is worth noting that international investors have withdrew more than $4 billion from Indian stocks this month alone, following a $11 billion outflow in the previous quarter.

Concerns over US monetary policy, as well as uncertainties about President-elect Donald Trump’s proposed plans, have contributed to a surge in negative wagers on the rupee. All of these reasons, together with increased hedging activity, appear to have reinforced the pressure on the Indian rupee.The rupee’s downward trend has continued for nearly three months, accompanied by increased volatility.

Brad Bechtel, global head of foreign exchange at Jefferies, told news agency  that the rupee’s sustained fall was consistent with its real effective exchange rate. The rupee’s 40-currency trade-weighted REER indicates it is at its most overvalued level in at least two decades, he added.

Market analysts predict further depreciation in the rupee. Bechtel expects the rupee to weaken to 88 in the near-to-medium term, while ANZ Bank forecasts the rupee to reach that level by March.