Indian Rupee's Appreciation Phases Weaken

Key Findings

• The magnitude and duration of the Indian rupee's appreciation phases have compressed significantly over the past four decades.
• Appreciation phases now rarely exceed 2-3% over short bursts of a few days, down from sharp, sustained moves seen a decade ago.
• The rupee's appreciation has become structurally constrained, making a move to 90 against the dollar (a roughly 5% gain) look like an outlier.

Recent Trends

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• The rupee touched a low of 94.81 against the dollar on Friday due to uncertainty over the end of the West Asia war.
• In real effective exchange rate terms, the currency was undervalued in February, with the rupee at its lowest level in 12 years.

Historical Context

• The most dramatic appreciation on record occurred after the 2013 taper tantrum, when the rupee strengthened by over 6 percent in just one week in September 2013.
• Post-2015 data shows that even the strongest rallies have struggled to cross the 3 percent mark, reflecting a structural shift in currency dynamics.

Appreciation Cycles

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• Rupee appreciation tends to occur in short-lived streaks rather than prolonged trends like depreciation rallies.
• The longest continuous strengthening phase in the dataset lasted about 10 trading days, while most appreciation cycles ended within a week.

Global Factors

• Earlier large rallies were often triggered by crisis reversals, such as post-2008 capital inflows or the unwinding of panic during the taper tantrum.

Can the Rupee Hit 90?

• A move to Rs 90 against the dollar would require nearly a 5 percent appreciation in the currency.
• Monthly averages show that such appreciations have been uncommon since the pandemic and have occurred only once over the last decade.