(MENAFN- KNN India)
New Delhi, Jan 20 (KNN) The Indian rupee's Real Effective exchange rate (REER) declined to 107.20 in December from November's peak of 108.14, according to recent data from the Reserve bank of India.
This movement reflects the currency's evolving position since January 2024, when the REER stood at 103.66, with the rupee experiencing a roughly 3 percent depreciation against the dollar throughout the year.
The December decline in REER, which measures the currency's inflation-adjusted trade-weighted value against major trading partners, coincided with a 1.31 percent depreciation in the rupee's value.
During the same period, the dollar index strengthened by 2.75 percent to 108.48, reflecting the greenback's growing strength against six major currencies.
Several factors contributed to the rupee's weakness, including substantial foreign portfolio investor outflows prompted by rising US Treasury yields.
The Federal Reserve's decision to implement a smaller-than-expected 25 basis point rate cut in early December, coupled with signals of fewer future rate reductions, further strengthened the dollar. Additionally, India's widening merchandise trade deficit in November exerted additional pressure on the currency.
CR Forex Managing Director Amit Pabari noted that unfavorable trade deficit data and continued outflows led to the rupee's devaluation to 85.50 per dollar, suggesting that January's REER figures could show further decline based on current market trends.
The currency's vulnerability is evident in its performance since November 2024, with record lows recorded in approximately 30 out of 47 trading sessions.
Despite the Reserve Bank of India's aggressive interventions, including significant spot dollar sales and forward market operations, the rupee's decline persists.
In November alone, the RBI conducted record spot market interventions, selling USD 20.2 billion while purchasing USD 30.8 billion, with the net short position in the forward market expanding to USD 58.9 billion.
Bank of Baroda's Chief Economist Madan Sabnavis suggests potential for further depreciation of 20-30 paise in the rupee's value under current external conditions.
Analysis indicates that with major trading partners experiencing 3.6 percent depreciation, the rupee could face an additional 1.4 percent decline in the near-to-medium term, though this projection needs to be considered alongside inflation differentials for a complete assessment.
(KNN Bureau)
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