Why the rupee remains under pressure despite lower CAD?

Mumbai: The Indian rupee is expected to weaken further, despite a contraction in current account deficit (CAD) to around 0.5% of the GDP from about 2.5% three years ago, as tighter global financial conditions and persistent foreign portfolio outflows make the gap harder to bridge, economists said.

The rupee has depreciated 5% this calendar year, with further weakness likely despite sustained Reserve Bank of India (RBI) intervention, as external pressures remain beyond the central bank’s control.

The rupee is the fourth-worst performing currency in Asia this year, with the Indonesian rupiah the weakest, Bloomberg data showed. The Indonesian currency fell 7.3% while the South Korean won was the best performer, gaining 8.5%. The Chinese yuan gained 4.6% this year.

“The size of the deficit that can be financed without persistent pressure on the exchange rate or FX reserves… needs to adjust as global capital becomes scarcer and costlier,” said Dhiraj Nim, economist and FX strategist, ANZ Bank. “Therefore, an expected FY27 CAD of 1-1.5% of GDP could prove difficult to finance,” Nim said.
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Additionally, with Brent crude prices hovering near $105 a barrel, further rupee depreciation would be a natural consequence of a higher oil import bill, economists said. As one of the world’s largest oil importers, India remains vulnerable to elevated crude prices, which add to inflationary pressures and weigh on the currency.
Persistent foreign portfolio outflows are compounding the pressure, with sustained selling of Indian assets adding to dollar demand and reinforcing expectations of further rupee weakness.Read more: Jio IPO vs Airtel shares: Which telecom giant offers greater valuation comfort to investors?

“Despite the recent measures, we see limited room for sustained INR appreciation on grounds of manufacturing and trade competitiveness. A challenging portfolio flows outlook leaves the door open to further gradual rupee depreciation, with high sensitivity to oil price movements and risk sentiments,” Radhika Rao, senior economist at DBS Bank said in an October 17 report.

Recently, the RBI introduced a special window to meet the daily dollar requirements of three state-run oil companies diverting their purchases away from the spot market. It has also tightened rules on foreign-exchange derivatives to curb speculative dollar demand and excessive hedging.