The rupee crossed the psychologically significant 90 mark against the US dollar for the first time on Wednesday as India’s trade gap, continued exits by foreign investors and delays in a much-anticipated trade deal with Washington weighed on the local currency, experts said.

The rupee traded as low as 90.29 against the dollar before closing 10 paise higher on Wednesday against the previous close of 89.87/$1. The annual slide for the currency against the dollar is the sharpest since 2022.

However, dealers said the Reserve Bank of India (RBI) seems comfortable with a weaker rupee to support export competitiveness, especially in the context of the pending trade agreement with the US.

“This is more depreciation than depreciation,” said a trader at a public sector bank.

The Indian currency has jumped from 89/$1 to 90/$1 in just eight trading days and traders expect the rupee to cross 91/$1 in the coming months. The sharp drop has boosted hedging costs with the one-month dollar/rupee non-deliverable forward premium now at a seven-month high of 23.25 paise on Wednesday, LSEG data showed.

“The RBI appears to be taking advantage of low domestic inflation and supporting the rupee amid the pending trade deal, where the currency is an armoury,” said Anindya Banerjee, head of commodities and currencies at Kotak Securities.

India’s current account gap narrowed nearly 90 basis points year-on-year to 1.3% of gross domestic product in the second quarter, but the gap in merchandise trade in October was the widest ever — at $41.7 billion.

A relative straggler

The rupee fell 5.3% year-on-year, putting it on track for its steepest annual decline since 2022 and making it the worst-performing Asian currency. While the RBI intervened intermittently to control the pace of devaluation, the scale of its intervention appeared relatively limited.

“Amid this fall, importers will hedge their positions and payments for the next quarter or so, while exporters wait for the currency to stabilize to take any positions,” said Sejal Gupta, head of forex and commodities at Nuwama.

Gupta hopes the currency will cross the 91 mark next month. It took a little less than a year for the rupee to fall from 85 to 90, or less than half the time it took to fall from 80 to 85.

India’s real effective exchange rate, or REER, has already fallen below 98 against a basket of major world currencies and competing currencies, and the current rate of decline should further reduce the REER. A reading below 100 indicates that the rupee is undervalued, indicating India’s export competitiveness in a challenging year for global trade.

In terms of portfolio outflows, India has been one of the worst-hit markets globally, with net equity sales by foreign investors amounting to nearly $17 billion so far this year. Net foreign direct investment (FDI) also turned negative for the second consecutive month in September, RBI’s November bulletin showed.

To be sure, foreign investors have been major buyers in India’s red-hot primary market, buying a net $7.6 billion in initial public offerings (IPOs) so far this calendar year. But exits from the secondary market – more than $24 billion in a calendar year – have significantly exceeded their collective commitment to the primary market.