India’s central bank, the Reserve Bank of India (RBI), is allowing the rupee to weaken amid challenging external conditions, according to sources familiar with the RBI’s approach cited by Reuters. This marks a shift in policy as the currency faces growing pressure.

One source explained the rationale behind this stance: “It doesn’t make sense to spend reserves when fundamentally everything is against the currency.” The rupee has fallen sharply in recent sessions and is currently Asia’s worst-performing currency this year, down 5.5% year-to-date.

The RBI is reported to have stopped defending any specific level for the rupee. Instead, it is focusing on preventing disorderly market moves or speculative attacks rather than intervening to prop up the currency continuously. This change reflects weaker capital inflows, with foreign investors having sold $17 billion in Indian equities so far this year. Additionally, foreign direct investment (FDI), trade receipts, and offshore fundraising have all slowed down, reducing demand for the rupee.

Several factors are contributing to these near-term pressures on the currency, including uncertainty in India-US trade relations, elevated crude oil prices, and persistent foreign institutional investor (FII) outflows. The rupee’s depreciation has also weighed on the returns of foreign-currency denominated Indian equity investments, despite the MSCI India index rising 7% this year.

The rupee did see a brief rebound to 89.89 against the US dollar on Thursday, supported by reports of RBI intervention and a softer US dollar.

Forex traders should now watch closely for the RBI’s policy announcement on Friday, which comes amid strong economic growth, easing inflation, and ongoing geopolitical risks that could all influence the rupee’s trajectory.

Original Source: Eamonn Sheridan of investinglive.com