Behind rupee's weakness against the dollar: trade headwinds, RBI policies, Pg22

Key Highlights:

• The RBI intervened on Wednesday by selling US dollars, causing the rupee to strengthen against the dollar by almost 1%.
• Despite being the fastest-growing major economy with controlled inflation, the rupee has weakened by approximately 6% over the past year.
• Trade weakness, exacerbated by high US tariffs on Indian goods, contributes to the rupee's depreciation.
• A Bank of Baroda (BoB) study identified RBI's forex interventions, changes in forward contracts, and Foreign Portfolio Inflows as key factors influencing the rupee's exchange rate.

Detailed Insights:

• The rupee's weakening occurs despite strong economic indicators, including being the fastest-growing major economy and controlled inflation.
• US tariffs on Indian goods have worsened trade imbalances, reducing demand for the rupee and deterring investors due to trade deal uncertainty.
• Compared to other markets, Indian equities have underperformed, with the Sensex rising only 8% from December 2024 to December 2025, suggesting investor concerns about valuation or profitability.
• The RBI's actions, including buying and selling dollars, influence interest rates and the rupee's exchange rate, with forward market interventions being more effective than spot interventions.
• Trade deficit surprisingly has little impact on rupee fluctuations, potentially because trade data doesn't reflect actual currency flows within the same period.
• Factors beyond economics also play a role in rupee fluctuations, as economic variables account for only 13%-14% of the total variation in currency change.

Key Concepts Involved:

• Exchange Rate: The value of one currency expressed in terms of another.
• Trade Deficit: The amount by which a country's imports exceeds its exports.
• Foreign Portfolio Investment (FPI): Investment in the financial assets of a foreign country.