The Indian rupee reached an unprecedented low for the seventh consecutive session on Thursday, further exacerbating its losses this quarter due to a combination of an expanding trade deficit and sluggish capital inflows. The currency fell to a record low of 85.2525 against the U.S. dollar, mirroring declines seen among many of its Asian counterparts. Since the start of October, the rupee has depreciated by 1.74% and is on track for its poorest quarterly performance since the July-September 2022 period.

The evolving balance of payments (BoP) situation in India, along with the rise in the dollar and U.S. yields following Donald Trump's election victory, has placed significant pressure on the South Asian currency. According to calculations by IDFC First Bank, India's trade deficit has increased by 18.4% year-on-year from April to November. Additionally, capital outflows from equity and debt markets are projected to reach $10.3 billion this quarter, a stark contrast to the $20 billion inflows recorded in the previous quarter, as reported by NSDL data.

Economists suggest that this combination has led to a BoP deficit in the current quarter, with estimates ranging from $20 billion to $30 billion for the fiscal year, compared to a surplus exceeding $60 billion in the last fiscal year. The outflows in the BoP, along with a robust dollar, are expected to maintain downward pressure on the rupee. IDFC has predicted that the currency may weaken to 86 by September 2025.

DOLLAR DEMAND RISES  

The dollar's surge following Trump's election victory is compounding the challenges faced by the rupee. The dollar index is currently near its year-to-date highs, fueled by expectations that the policies of the U.S. President-elect will stimulate growth and inflation. The anticipation of increased inflation has led Federal Reserve officials to indicate fewer rate cuts may be on the horizon for the coming year.