Rupee is near an all-time low against the US dollar and mild depreciation is likely to continue

Interest rate hikes by the US Fed backed the US dollar and caused significant outflows from the domestic markets, which led to a depreciation in the rupee.

Despite this, the Indian currency's depreciation is relatively lower as compared to other emerging market currencies.

"Rupee has actually depreciated by roughly about 0.6-0.7% whereas most of the emerging market currencies have been on the depreciation path, and some of them have actually depreciated quite significantly during this entire period. So the rupee has actually been a very stable currency over the last 10–11 months," explains Neeraj Gambhir, Group Executive & Head-Treasury, Markets & Wholesale Banking Products at Axis Bank.

According to Gambhir, there is an impact of the marginal worsening of the trade deficit on the rupee.

"We are also seeing some kind of weakness—I won't say weakness—but lesser sort of flows on the FDI front, which is kind of impacting on the balance of payment calculations that the market does."

In the first quarter of the current fiscal year, India had a very strong balance of payment surplus.

"But since then, it has been sort of steadying on the higher side in terms of current account deficit," says Gambhir.

The overall current account deficit, however, is still expected to be less than 2%.

"But compared to where we were expecting to be, at the end of the first quarter, I think there has been some worsening on the trade deficit side. So I think that is also in some senses getting reflected in where the currency is trading today."

Another factor that affects the value of the Indian rupee is the global crude oil prices.

In the short term, the crude oil benchmarks have gained, supported by a weaker US dollar. A weaker dollar makes commodities more attractive for overseas buyers.

Global crude oil prices are also inversely proportional to the value of the rupee. If the value of crude oil eases, the value of the rupee appreciates and vice versa.

In the next six months, Gambhir expects the mild depreciation in the Indian currency to continue.

"If the FPI flows come in, there could be a little bit of catch-up appreciation in the rupee, though not too much. But I think on a slightly longer term horizon, about six months or so, I do expect very mild depreciation on the rupee to continue, largely because we are still actually looking at somewhere between 1.7% to 2% as the current account deficit, and we will require funding to external flows to fund that current account deficit."

A drop in inflation is, on the other hand, aiding in limiting the currency's downside.

According to the official data, the Consumer Price Index inflation for the month of October declined to a four-month low of 4.87%.