Rupee at record low: Markets eye RBI’s next move as currency breaches 89; corporates’ worries mount

The rupee’s trajectory has become a key concern for financial markets. Banks have reduced trading exposures, while numerous importers with large unhedged positions are facing losses. Corporates engaged in over-the-counter forex derivative transactions, anticipating stable rupee levels, are reportedly worried as the currency crosses 89. The financial sector remains uncertain whether the Reserve Bank of India (RBI) will allow further rupee depreciation to support exporters affected by US tariffs. This speculation intensified after the currency hit a historic low, surpassing 88 against the dollar on Friday. “It will be interesting to see how far RBI is willing to allow rupee depreciation. With exports estimated to fall a bit, bear pressure on rupee will be sustained unless US tariff issue is resolved quickly,” said Haresh Desai, market veteran and founder of Rajwade Treasury Consultants, as quoted by Economic Times. With inflation currently manageable, analysts suggest the RBI may refrain from substantial dollar sales.Currency movement analysis Samir Lodha, former banker and MD of corporate advisory firm QuantArt, observed, “While there was some month-end demand, the rupee slipped past 88, most probably because RBI stepped back. Left entirely to the market, these levels would have been seen a week earlier, which suggests it could be more of a ‘decision’ to allow the rupee to slide. In that case, further weakness in the rupee is possible.” However, he noted that market news could rapidly bring the rupee back to 87, as reported by ET. The upcoming US non-farm payroll report on September 5 is also significant. A downward revision could encourage US interest rate cuts, potentially supporting the rupee. “In August 2024, the revised number was lower than what was initially reported. Traders are waiting to find out if that will happen this year too,” a senior banker commented. A weaker rupee could boost export competitiveness and generate a larger RBI surplus for government dividends, particularly helpful amid expected fiscal pressures from the 8th Pay Commission and reduced GST rates.Additionally, determining the RBI’s intervention point for currency support remains uncertain, often influenced by the perspectives of key officials. The central bank may view the 50% US tariff as temporary, expecting a resolution within months. Under Governor Sanjay Malhotra’s leadership, the rupee has demonstrated increased flexibility, declining over 3.3% since March’s rate of 85.47. During Shaktikanta Das’s governorship, the financial sector had expected minimal rupee fluctuations. This assumption shaped importers’ derivative strategies for dollar purchases, and changes in this pattern could affect companies, though less severely than past derivative-related losses.Derivative considerations The ‘Seagull’ derivative structure involves specific call and put options at various strike prices. Importers’ profits decrease when market rates exceed their sold call strike price. Many had set strike prices above 88. “Seagulls and call spreads are good options when managed well. With tools and understanding, they can be managed—converted into vanilla hedge or full hedge. Companies, which do nothing even when the rupee weakens, would lose,” Lodha explained. Desai added that many corporate treasuries remained complacent despite impending challenges. Net importers and foreign currency borrowers face particular uncertainty. “A few corporate treasuries with seagulls (and call spreads) taken as so-called ‘hedges’ could also suffer huge losses, and in any case massive swings in their quarterly profit and loss on mark-to-market valuation changes,” Desai added.