The Indian rupee weakened sharply by about 0.5% or nearly 40 paise during the midday trade on June 4, reaching 85.97 against the US dollar. This drop happened because investors expect the Reserve Bank of India (RBI) to cut interest rates this week, and also because foreign investors are pulling money out of Indian stocks and bonds.
Currency experts say that many expect the RBI to reduce rates by 0.25% on June 6. This expectation is causing a drop in forward premia rates (which affects how currency is priced in the future) because the difference between interest rates in India and the US is getting smaller. When forward premia rates fall, the current exchange rate usually goes up (meaning the rupee weakens)
Anil Kumar Bhansali, who is the Head of Treasury at Finrex Treasury Advisors, said the rupee is likely to trade between 85.35 and 85.85 against the dollar in the near future.
On June 3, the rupee closed at 85.5925 against the dollar but opened 16 paise lower on June 4 due to foreign investors selling Indian stocks and bonds.
The rupee has been under pressure in recent days because of strong demand for the US dollar, foreign investors withdrawing money from the Indian market, and a dip in the dollar index.
On June 3, foreign investors sold shares worth Rs 2,854 crore, while domestic investors bought shares worth Rs 5,908 crore. So far this year, foreign investors have sold shares worth Rs 1.27 lakh crore, but domestic investors have bought shares worth Rs 2.86 lakh crore.
reported that foreign investors’ withdrawal from Indian government securities is the highest this quarter since Indian bonds were included in global bond indexes. Experts say this is because the interest rate difference between Indian and US 10-year bonds has narrowed.
Data from the Clearing Corporation of India shows that foreign investors pulled out Rs 25,543.68 crore from Indian bonds between April 2 and June 3 under the Fully Accessible Route (FAR). This is the first time foreign investors have shown outflows in a quarter since the Indian government bonds were included in global indexes.
