The Indian Rupee hit a lifetime low level of 80.43 on Thursday after US Fed’s decision to hike interest rate by 75 basis points yet again. The domestic currency opened at a record low of 80.2850 per US dollar, down from the previous close of 79.97. The Fed on Wednesday raised rates by 75 bps, in line with expectations. More importantly, it hinted that more hikes were coming and that rates would stay elevated until 2024. The 10-year bond yield rose sharply by 5 bps to 7.289% from its Wednesday’s close of 7.234%. Bond yield and currency prices move in opposite directions.
Rupee may weaken to 81 capital markets witness outflows
“As anticipated, the Fed increased the federal funds rate by 75 bps to the 3%-3.25% range, the third straight three-quarter point increase and pushing borrowing costs to the highest since 2008. Also, flags a more hawkish stance as the projections signal another 1.25 bps hike in 2022. The so-called dot plot showed interest rates will likely reach 4.4% by December, above 3.4% projected in June, and rise to 4.6% next year. Inflation, as measured by PCE, is seen to reach 5.4% in 2022 (5.2% projected in June) and 2.8% in 2023 (vs 2.6%),” said Jigar Trivedi, Senior Analyst – Currency & Commodity, Reliance Securities.
“The RBI’s policy is due on 30th September which must be monitored closely. Moreover, amid an escalation of geo-political tensions between Russia & Ukraine, energy prices may stay elevated and USDINR is likely to appreciate further. As per technical charts, the dollar index has the potential to touch 112.50. We don’t deny the possibility of rupee weakening to 81 going forward if we experience outflows from the Indian capital markets,” he added.
“Today as expected rupee is trading at life time level of 80.43, while Eur against dollar is trading at 20-year low levels of 0.98 and GBP against dollar is also trading at 29-year low level at 1.12 levels. “We are expecting that due to the hawkish statement of Fed, major currencies against the US dollar may depreciate. Now, rupee may further depreciate and test 81 to 82 levels very soon,” Anuj Gupta, Vice President — Research at IIFL Securities.
Downtrend in rupee to continue
“The rupee chocked a new life low after the Federal Reserve’s hawkish policy outlook boosted the haven appeal. We believe the downtrend in the rupee could continue but at a slower pace amid lower commodity prices, foreign fund inflows and RBI intervention. Spot USDINR is now having resistance in the range of 81.25 to 81.40 while the support has been moved to 79.70,” said Dilip Parmar, Research Analyst, HDFC Securities.
The Reserve Bank of India (RBI) has been selling dollars in order to moderate the depreciation in rupee. A Reuters report, quoting a government official, said the Indian government is not averse to a weaker rupee in line with global market fundamentals. According to CR Forex Advisors, RBI is unlikely to use its forex reserves to defend currency as it earlier did amid a severe liquidity crunch in the market. “Clearly there is pressure on RBI and will be interesting to see how RBI will be able to defend rupee which is above 80.00 levels. If RBI lets rupee on its free course in line with the global peers, 80.50 to 81.00 shall be shortly seen”, CR Forex said in its note.