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Rupee hits all-time low with more trouble ahead: 5 reasons why it is bad for markets

The Indian rupee continued its slide, hitting another all-time low of 88.33 against the US Dollar, surpassing the previous record of 88.30 set on Friday. The rupee remains undervalued relative to its emerging market peers, and near-term pressure is expected to persist due to trade war concerns.

"Sentiment remains weak, and the rupee is expected to trade within a range of 87.65–88.45," said Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities.

One reason for the falling rupee is mounting concern over a widening fiscal deficit following the US implementation of tariffs on Indian products. Additionally, steady hedging demand from importers, coupled with FPI outflows from both debt and equity, has added pressure.

Analysts note that while the upcoming GST Council decision may lend some support, markets are awaiting clarity on the final GST changes before taking a decisive view.

"The RBI is expected to intervene if the spot rate approaches 88.50, though a sustained reversal would require a rollback of the additional US tariffs," said Anindya Banerjee, Head of Currency and Commodity Research, Kotak Securities.

Here are five reasons why a weak rupee is detrimental to markets:

1. Increased inflation

As India imports major commodities like crude oil, a weaker rupee makes these imports more expensive, leading to higher fuel prices and increased costs for transportation and other goods. Higher inflation usually spooks markets.

2. Higher import costs

Businesses and consumers face increased costs for imported items, including electronics, machinery, and raw materials. This can squeeze corporate profit margins and reduce consumer purchasing power.

3. Wider trade deficit

A depreciating currency makes imports more expensive, potentially widening the country’s trade deficit if import demand remains high. This can create a vicious cycle of further rupee weakness.

4. Foreign capital outflows

A falling rupee often signals foreign investors pulling funds from domestic stock and bond markets, adding downward pressure on both the currency and markets.

5. Increased corporate debt

Indian companies with debt denominated in foreign currencies must pay more in rupees to service loans, straining finances and profitability, which can negatively impact their stock prices.