Indian markets ended the previous session on a weak note, with the Sensex slipping 436.41 points (0.51%) to 84,666.28 and the Nifty falling 120.90 points (0.47%) to 25,839.65. Alongside equity weakness, the Indian rupee continues to underperform global peers, charting a divergent path even as the dollar index softens.
Why Is the Rupee Falling Despite a Weak Dollar?
According to market experts, the primary reason behind the rupeeтАЩs decline is heavy foreign capital outflows, particularly from the Indian bond market.
Speaking on CNBC TV18, Anindya Banerjee, Head of Currency & Commodity Research at Kotak Securities, said the USD-INR movement appears disconnected from global dollar trends at first glance. However, a deeper look reveals that rising US bond yields have triggered foreign investor withdrawals from emerging markets, including India.
Foreign Portfolio Investors (FPIs) have reportedly pulled out nearly $2.5 billion from Indian debt and equity markets in December, putting sustained pressure on the rupee.
RBI Intervention and Rupee Outlook
Banerjee noted that while the Reserve Bank of India (RBI) is intervening in the currency market, its actions have been sporadic so far. He added that the central bank may step in more firmly near the 91-per-dollar level to curb excessive volatility.
He also suggested that the RBI appears comfortable with a gradual depreciation of the rupee, as low domestic inflation gives policymakers room to tolerate a weaker currency, especially to support exports amid a challenging global trade environment.
Impact on Indian Equities
The weakening rupee is emerging as a key headwind for Indian equities, especially when compared with North Asian markets, which are benefiting from stronger earnings momentum and relatively stable currencies.
Manishi Raychaudhuri, CEO of Emmer Capital Partners, highlighted that among the three major drivers of equity performanceтАФearnings, currency, and interest ratesтАФIndia currently has support only from interest rates. In contrast, currency weakness and relatively softer earnings growth are limiting IndiaтАЩs appeal versus other Asian markets.
As foreign flows remain cautious, movements in the rupee and bond yields are likely to stay central to market sentiment in the near term.
