Rupee pressure likely to persist for now. Flexibility may be apt strategy for RBI to counter uncertainty

Rupee had a major fall this week, led by strong US macro data, rising crude prices. China’s currency moves, Japan’s possible rate hike & domestic growth concerns may maintain pressure.

At the start of the week, the rupee witnessed its steepest fall in almost two years. The strong jobs data in the US, pointing towards slower pace of rate cuts, and resurgence in global crude oil prices were the fresh triggers for the fall of the rupee, which has already been reeling under pressure since November last year.

Further, China’s recent currency moves, Japan’s possible rate hike and domestic growth concerns are likely to keep Indian currency and markets on edge in the short-term.

Strong US macro data, uncertainty on monetary policy & markets

Data released by the US Bureau of Labor Statistics showed that the total non-farm payroll employment increased by 256,000 in December, up from a revised figure of 212,000 for November.

The unemployment rate came in at 4.1 percent against the expectation that it would be at 4.2 percent. A stronger-than-expected jobs data for December, coupled with inflation risks from the new Trump administration, have lowered the possibility of aggressive rate cuts by the US Federal Reserve. Consequently, both the dollar index and US bond yields have risen, putting pressure on emerging market economies’ currencies like India.

To be sure, the rise in the US bond yields is also attributed to uncertainty surrounding Trump’s policies. The clear manifestation of uncertainty is visible in the fact that the long end of the curve has risen more than the policy responsive short-end of the curve.

To put it differently, the yield curve has steepened markedly since November. This steepening is explained by a rise in term premium. Investors in long-term bonds are demanding higher compensation for locking in funds as they are uncertain of the likely path of the markets, the monetary policy, and in general, the economy.

Last week, the US Treasury imposed one of the most comprehensive packages of sanctions to disrupt Russia’s energy export revenue. It imposed restrictions on two Russian oil producers as well as close to 180 oil-carrying vessels that were exporting oil to different nations, including India. Sanctions have also been imposed on some insurance companies.

These measures have the potential to upend the International Energy Agency’s (IEA) projection of a significant oil supply surplus for 2025. Global crude oil prices, which ended 2024 at around USD 75 per barrel, have surged to above USD 80 per barrel, following the sanctions.

In the last three years, India has emerged as one of the largest importers of Russian oil. Between April and November, India imported crude worth USD 35.8 billion from Russia, accounting for 38 percent of the overall crude oil imports during this period.

While the supply for the next two months is not likely to be impacted, Indian oil refiners will now have to look for alternative sources of fuel supply, including from the Middle East, without discounts. This could impact the margins of oil marketing companies.