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Rupee hits all-time low of 77.43; strong dollar, elevated crude prices, risk aversion in markets drag currency

The Indian rupee fell to a fresh all-time low of 77.43 against the US dollar on Monday as elevated crude oil prices, inflation fears, interest rate hikes and weak domestic equities weighed on investor sentiments. Risk aversion in global markets, dollar strength dented demand for riskier assets, dragging the local unit lower

Rupee vs dollar, dollar to rupee
Rupee is hitting an all-time-low due to multiple reasons including stronger USD, weaker Asian currencies, rebound in oil prices, ongoing Russia-Ukraine war, FII outflow, and a surprise hike by the RBI.

The Indian rupee fell to a fresh all-time low of 77.43 against the US dollar on Monday as elevated crude oil prices, inflation fears, interest rate hikes and weak domestic equities weighed on investor sentiments. Risk aversion in global markets, dollar strength dented demand for riskier assets, dragging the local unit lower. The rupee dropped as much as 0.7% to 77.43 against the greenback, slipping past the previous all-time low of 76.98 touched in March this year. Concerns over relentless sales of Indian assets by foreign investors also weighed on the currency, said analysts. The outlook on the rupee has worsened since Russia invaded Ukraine in February as the conflict led to a surge in global crude oil prices.

What’s dragging the rupee?

Elevated crude oil prices, surging inflation spook investors

Pessimistic global market sentiments along with strong American currency is causing the Rupee to depreciate. Market sentiments are also hurt as investors are concerned over surging inflation, monetary policy tightening across major countries in the globe, economic slowdown and escalating geopolitical tensions. Additionally, the widening trade bill as the country imports 85% of its oil needs, has spooked investors.”Market participants fear that rising crude oil prices will hurt India’s trade and current account,” said ICICI Direct.

Amit Pabari, MD, CR Forex Advisors said, “We are victims of that time when the Rupee is hitting an all-time-low due to multiple reasons. To describe a few points- a stronger USD, weaker Asian currencies, rebound in oil prices, ongoing Russia-Ukraine war, FII outflow, and a surprise hike by the RBI to tackle inflation could be the major reasons behind the same. Friday’s job report gave another boost to the US yield and thus DXY. Moving forward, RBI’s intention will be closely watched”

“Last week’s data suggests that RBI’s FX reserve further fell below $600 billion for the week ended 29th April. Broadly, Rupee could chase weaker fundamentals and a stronger dollar, but RBI could chase Rupee and suppress its intention. Overall, if the USDINR pair crosses 76.95 convincingly then we could see a further move towards the 77.50 to 78 level. And if it fails to cross, then it could be back to trade in a range of 76.10 to 76.90 zone,” Pabari added.

FII outflows, interest rate hikes, inflation: A triple whammy for Rupee

The net capital outflows have not helped the rupee either. Foreign investors pulled out over Rs 6,400 crore from the Indian equity market in the first four trading sessions in May and remaining net sellers for seven months to April 2022. “With central banks worldwide pressing the panic button and increasing interest rates. Foreign investors continue to sell relentlessly,” Vijay Singhania, Chairman at TradeSmart, told PTI.

Recently, RBI raised rates by 40bps and hiked CRR by 50bps. On the other hand, the Fed in its policy statement raised rates by 50bps and said that its $9 trillion balance sheet would be allowed to decline by $47.5 billion per month in June, July and August and the reduction would increase to as much as $95 billion per month in September. The Bank of England too raised rates by 25bps to 1%. These rate hikes have also led to Rupee depreciation. 

“The BoE sent a stark warning that Britain risks a double-whammy of a recession and inflation above 10% as it raised interest rates. Dollar continued to get support at lower levels after data showed the US economy added 428,000 jobs last month as compared to estimates of 391,000 job additions. Investors will be awaiting the release of inflation and IIP data to gauge a view for the currency.,” said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.

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