Rupee at record low as weak flows, stalled US trade talks eclipse blowout growth print

MUMBAI : The Indian Rupee fell to a record low on Monday as sluggish trade and portfolio flows, coupled with the lack of a U.S.-India trade deal, overshadowed the impact of stellar economic growth.
The rupee declined to 89.7575 against the U.S. dollar, dipping past its previous record low of 89.49 hit about two weeks ago. The drop came right after India posted a blowout GDP number that exceeded all expectations. The economy expanded 8.2% in the September quarter.

The rupee ranks among Asia’s worst-performing currencies this year despite resilience in domestic economic fundamentals which have boosted shares to record highs. The losses on the rupee would have been larger if not for the regular intervention from the central bank, traders say.
Bankers said the robust growth has offered little respite to the currency, which remains pressured by the lack of progress on a U.S.-India trade deal, importer hedging activity, and a balance of payments position that has turned less supportive.
The maturity of positions in the non-deliverable forwards market also hurt the rupee, traders said, while state-run banks were spotted offering dollars intermittently.

A “calibrated” rupee depreciation is “both inevitable and desirable” in the current macroeconomic environment, economists at J.P. Morgan said in a note. The longer there is no trade deal, the greater the onus on rupee depreciation would be to provide that offset, the economists said.
Comments from U.S. and Indian officials last month had raised hopes that the steep 50% tariffs on Indian exports would soon be reduced, but a deal has not been finalised.
The U.S. tariffs have dented trade and portfolio flows into Indian equities, leaving the currency reliant on central bank interventions for support.
Foreign investors have net pulled out over $16 billion from Indian shares over the year so far. India’s merchandise trade deficit hit an all-time high in October.

The rupee’s rough patch has brought down its 40-currency real effective exchange rate, a measure of competitiveness, to undervaluation territory.

At the end of October, the measure stood at 97.47, per central bank data. A level below 100 signals that a currency is undervalued relative to those of its trading partners.
Last month, the International Monetary Fund reclassified India’s foreign exchange framework as a “crawl-like arrangement”, noting that “while the exchange rate has exhibited increasing two-way movement this year, there remains room for additional exchange rate flexibility.”