India's tumbling rupee, fund outflows and the RBI's softer stance

The Federal Reserve's big rate cut in September had knock-on effects for India. The rupee surged against the dollar, reaching a two-month high. Since then, however, the currency has retreated against the greenback as stubborn US inflation data casts doubt on the Fed's rate-cut momentum. Back home, meanwhile, Mumbai's policy makers have taken a dovish turn.

The INR hit an all-time low against USD after the Reserve Bank of India (RBI) changed its stance from its previous, hawkish rhetoric of “withdrawal of accommodation” to a “neutral” stance. The RBI's remarks also resulted in a continued narrowing of the spread between Indian benchmark government bonds and their US counterparts.

As we have shown before, fund flows were probably also a factor in the rupee weakness. Asset-allocation data from our partners at EPFR shows a weekly net outflow from Indian equities for the first time since March 2023.

A less restrictive stance from the RBI would also reflect the nation's general disinflationary trend, as seen by core CPI dipping below target. Higher food prices resulted in an uptick in September headline inflation, however.     

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