The Indian rupee on Monday hit a record low against the US dollar as the Fed’s tough stance sent shockwaves among investors and concerns of an economic slowdown entered markets globally. The US currency has risen to a two-decade high against a basket of currencies on the interbank forex market. The strengthening of the dollar and rising crude oil prices may keep pressure on the rupee.
The local unit closed at 79.91 against the dollar against Friday’s level of 79.84 per dollar last week. Rupee Forex fell to its record low of 80.15 per dollar during intra-day trade Market,
Against a basket of peers, the US dollar hit a two-decade high of 109.48 before retreating. However, gains in the dollar were limited by the euro, which was supported by expectations of a rate hike by the European Central Bank (ECB).
Last week, US Federal Reserve Chairman Jerome Powell hinted at keeping interest rates high to fight inflation at the expense of economic growth in a Jackson Hole speech. This has created fear among investors about the economic slowdown. Road expected a slowing of rate hikes after an inflation reading in July came in at 8.5%—better than expected—from a four-decade high of 9.1% recorded in June. This has raised hopes of further strengthening of the dollar against currencies, which has weakened the rupee.
The depreciation in rupee was also on account of sharp broad-based selling in domestic equities and rising crude oil prices.
The Sensex closed 861.25 points or 1.46% lower at 57,972.62. Meanwhile, the Nifty 50 fell 246 points or 1.4% to end at 17,312.90. IT and banking stocks were the biggest hit.
On the performance of the rupee, Jatin Trivedi, VP Research Analyst, LKP Securities, said, “The rupee is largely in a downtrend as the Fed’s chair speech at Jackson Hole turned positive for the dollar which again touched a 19-year high. “
Trivedi further pointed out that RBI lacks intervention as the action slows down the pace of depreciation in the rupee rather than a temporary pullback as RBI is required to maintain foreign reserves. India’s reserves stand at $580,252 billion, down by US$27.05 billion at the end of March 2022. And given what happened in Sri Lanka, maintaining foreign exchange reserves makes sense.
India’s forex reserves have fallen to their lowest level since October 2020 at $564 billion due to a sharp fall in foreign currency assets.
Ritika Chhabra, Economic and Quant Analyst at Prabhudas Lilladher said, “The main reason for this decline is the fall in foreign currency assets, which RBI is using to moderate the rupee depreciation in the forex market.”
“Powell’s comments support the pricing of a higher fed funds rate for the longer term,” said Kenneth Brooks, a currency strategist at Société Generale, adding, “the notion that the Fed will begin cutting rates in mid-2023.” will give, is premature,” as reported by Reuters.
Going forward, Trivedi said, “every slight increase in rupee since last 6 months faces resistance, rupee is likely to be seen in a weak range of 79-81 for next few weeks. As dollar index showed resistance.” Has shown strength from $106 to $109. Majority will maintain the depreciation of rupee. Crude above $100 again guides to continuation of rupee’s weakness.”
This month, till August 29, the FPI inflow is approx. 49,140 crore in equity market as per NSDL data.
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