InvestorQ : Do you see the Indian rupee weakening further from here?
Khushi Patel made post

Do you see the Indian rupee weakening further from here?

Dhwani Mehta answered.
2 months ago

In the last few days, the Indian rupee has crossed the 78/$ mark and the next level that markets are watching is the 80/$ level. That would largely depend on a number of factors but let us look at what the indicators show. One such indicator is the forward premium that banks pay on rupee forwards. Amidst rising hedging demand, there is a shortage of cash dollars and RBI forward market intervention has pushed onshore 1-year forward premiums to their lowest levels in over 10 years. Forward premiums are down to 2.8% annualized.

The reason is that there is dollar scarcity in the market and it is getting compounded by the RBI taking delivery of maturing forward contracts. The reason is that when the forward premiums fall, it leads to unwinding of carry trades as they become less attractive. When overseas investors unwind their carry trades, it is likely to put pressure on the Indian rupee. To add to the problems, FPIs have taken out more than $31 billion from Indian markets since October 2021 and that is adding to the shortage of dollars making it vulnerable.