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Rupee falls to record low amid strong US dollar, risk aversion, rate hike concerns; here’s where it may peak

The Indian rupee continued to weaken on Thursday and fell to a fresh record low of 80.06 against the US dollar, tracking losses in most other Asian peers.

Rupee falls to record low amid strong US dollar, risk aversion, rate hike concerns; here’s where it may peak
So far this year, the rupee has lost over 7% of its value

The Indian rupee continued to weaken on Thursday and fell to a fresh record low of 80.06 against the US dollar, tracking losses in most other Asian peers; however, traders expect dollar-selling intervention by the Reserve Bank of India (RBI) to limit losses. The Indian rupee has been hitting fresh lows for the past few sessions, and fell to a low of 80 vs the USD for the first time on Tuesday. So far this year, the rupee has lost over 7% of its value. RBI is prepared to sell another $100 billion to defend the rupee from rapid falls, according to a Reuters report citing an unidentified source.

“While continuing with its declining spree, the Indian rupee has dived to yet another record low, owing to concerns about the interest rate normalisation path of the US Fed and the deteriorating growth environment which have led to a global flight to the dollar, while causing an exodus of foreign funds from the domestic markets,” said Sugandha Sachdeva, Vice President – Commodity and Currency Research, Religare Broking.

“The Indian rupee is still reeling under pressure even as there has been a broad rally in risk assets and the dollar index has also softened from its multi-year highs. The recent bout of weakness is caused by strong dollar demand from oil importers with crude oil prices holding steady. Crude oil prices have again surged higher after a brief period of consolidation as Saudi Arabia has not committed to increasing oil output. Besides, as the rupee hit the 80 to the dollar mark, importers and corporates with huge overseas loans are rushing to hedge their foreign currency exposure, which is acting as a key headwind for the domestic currency,” she added.

Rupee inclined on a downwards trajectory

Amid a backdrop of uncertainty and Europe in the grip of an acute energy crisis, markets would be closely eyeing the crucial European Central Bank monetary policy decision where it is likely that the ECB would deliver a 50bps rate hike to tame worsening inflation. A hawkish stance of the ECB would lead to further pressure on the greenback while aiding the domestic currency. On the contrary, a slightly dovish tone would mean renewed strength in the dollar index, which shall further suppress the Indian rupee. “Going forward, even as the rupee is inclined on a downwards trajectory, we reckon that the domestic currency is likely to find a strong cushion at the 81 mark,” Sachdeva said.

INR likely to peak around 82 against US dollar

“INR has been under steady depreciation pressure throughout this calendar year, courtesy of monetary policy tightening by the DM economies and the consequent FPI outflows from capital markets. India’s widening trade gap and capital outflows also raised the risks for the rupee.  Nevertheless, RBI is aggressively intervening in FX markets to stem the weakness in INR, resorting to sell/buy swaps in the spot and forward market. Moreover, there has been a slew of measures taken by the central bank and the government to boost inflows of Forex and arrest the Rupee fall. In terms of the INR outlook for the rest of this calendar year, we sense that the worst is priced in the currency, with the value likely to be peaking around 80.5-81 against the greenback,” said Hitesh Jain, Lead Analyst – Institutional Equities, Yes Securities.

He backed the negative outlook on the growing indication that inflation across the globe has peaked given the wide retreat in Food prices, Oil and other industrial commodities. Stress in the global supply chain is also reported to have eased, while global aggregate demand is slowing, manifested by a downgrade in global economic forecasts. Consequently, markets are tapering the expectations on the quantum of Fed rate hikes, which can be characterised by a retracement in US 10yr yields to 2.9% from the peak of 3.4%. The buoyancy in the dollar index seems to be petering out, wherein Euro is now seeing a strong reversal from the parity. 

“On India’s foreign capital portfolio flows as well, July trends show FII outflows from the Equity markets have slowed during the first fortnight, while Indian markets have managed to fetch some gains during the last 30 days, even when pain persists in global equities. Perhaps a change in trend indicates FIIs are having a change of heart for India. All these developments allude to lesser downward pressure on the INR, with the USDINR due for some mean reversion or possibly a consolidation around the 79 mark.” he said.

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