Several traders said on September 1 that the Indian rupee reached its highest level in about a month on Tuesday, but this increase was mainly supported by the intervention of the Reserve Bank of India in the foreign exchange market.
It is reported that during the Asian trading session, the US dollar against the Indian rupee fell by 0.1%, closing at 95.0437. The one-month US dollar against the Indian rupee no-Principal forward contract experienced a maximum drop of 0.2%, closing at 95.21. Traders said that the Reserve Bank of India sold US dollars in the local market before the opening, selling at least $5 billion in the spot market.
After a 0.8% decline in July, the currency saw a slight recovery in August.
Previously, Indian media outlet The Hindustan Times reported in May that the rupee's exchange rate against the US dollar had fallen by 12% over the past 12 months.
The primary external pressure faced by the rupee comes from the conflict with Iran, initiated by the United States. This conflict continues to drive up oil prices. Nearly 90% of India's crude oil consumption relies on imports. High oil prices directly increase import costs, widen the trade deficit, and exacerbate inflationary pressures.
However, there is more than just this that concerns the Indian market. According to a report by the Financial Times on May 12, within two months, foreign portfolio investors withdrew approximately 2 trillion rupees (about 21 billion US dollars) from the Indian stock market, setting a record for the worst capital flight since India opened up its markets to foreign investment in 1993. A report released by Goldman Sachs during the same period indicated that since the market peaked in September 2024, foreigners have sold off Indian stocks by a total of 53 billion US dollars. An August survey by Bank of America found that India has become the least favored stock market in Asia, surpassing Indonesia.
Former Indian Central Bank Governor Duvuri Subbarao pointed out that India's attractiveness to foreign investors is weakening, and short-term measures to attract capital are unlikely to prevent the rupee from weakening. Even after the selling, India's relatively high stock prices continue to push investors towards other markets.
Subbarao also criticized the measures introduced by the Indian Central Bank in June to attract foreign currency deposits, calling them “borrowed dollars” that must be repaid upon maturity and “do not build confidence.” He argued that what is truly needed are “confidence-building capital inflows” through foreign direct investment and portfolio investments.
Analysts also pointed out that structural issues such as nepotism, weak manufacturing growth, and missed opportunities in the fields of artificial intelligence and semiconductors have collectively contributed to the continuous weakening of the rupee. In addition, India has been overly confident about its own economic prospects and has introduced a series of policies that are not friendly to investors, such as frequent adjustments to capital gains tax rates.
