(Bloomberg) — The Indian rupee, which fell above $84 to hit a new all-time high this month, is on a downward path as geopolitical risks boost oil prices and money flows out of local stocks amid a shift toward China.

Most read from Bloomberg

Barclays Plc. points to record high gold prices, a stronger dollar and increased risk aversion as reasons why the central bank could allow the rupee to fall. The lender predicts the currency will gradually fall towards 84.40 per dollar, while researcher QuantEco Research is targeting 84.50 and Kotak Mahindra Bank Ltd. expected a drop to 84.25.

“Global headwinds from geopolitical risks and a slower pace of monetary easing in the US, amid robust data, are expected to weigh on the rupee in the near term,” said Upasna Bhardwaj, chief economist at Kotak in Mumbai. The outflow of foreign portfolios from India and other emerging countries reflects this uncertainty as funds move to China in hopes of a recovery, she said.

Global funds have pulled $9.1 billion from Indian equities this month amid expensive valuations and a shift towards China. Even India’s index-eligible bonds, which had attracted around $2 billion in inflows every month since their inclusion in the global bond indices in June, saw two straight weeks of outflows this month.

The rupee fell to a low of around 84.10 per dollar earlier in October and closed at 84.07 on Monday. Barclays strategists led by Lemon Zhang believe that the Reserve Bank of India has allowed the rupee to fall above 84 due to the sharp rally in the currency’s nominal effective exchange rate since late September.

Traders said the central bank had defended the 84 level for two months, armed with nearly $700 billion in foreign reserves. The authority’s tight grip on the currency has kept speculators at bay, making a sharp depreciation unlikely and making the rupee one of the most stable among emerging markets.

This strategy has led to the rupee outperforming its Asian counterparts during periods of dollar strength and lagging behind when the dollar weakened.

“We have no control over the exchange rate; the rupee is depreciating against the dollar and we are buying dollars whenever the opportunity arises,” Governor Shaktikanta Das said at a Bloomberg event on Friday.

The story continues

Higher US interest rates ahead of next month’s US elections and a possible slowdown in debt flows could add to pressure on the rupee, according to Elara Securities.

“We see the rupee gradually moving towards a zone where risks are becoming more prominent than a quarter ago,” Garima Kapoor, an economist at Elara, wrote in a note. The company has lowered its rupee forecast to 83.5 from 82.8 earlier for fiscal 2025, with downside risks.

–With help from Ronojoy Mazumdar.

Most read from Bloomberg Businessweek

©2024 BloombergLP