Rupee hits fresh record low against US dollar

Asian currencies were under pressure after the Fed raised rates and provided a more hawkish outlook for its future rate path. Among Asian currencies, South Korean won was down 1%, Philippines peso fell 0.73%, China Renminbi dropped 0.6%, Japanese yen 0.57%, Thai Baht 0.51%, Taiwan dollar 0.5%, Malaysian ringgit 0.36%, Singapore dollar 0.28%, China Offshore spot 0.32%.

"The US Fed ratcheted up its hawkish rhretoric and set a higher terminal rate, whilst delivering a third consencutive 75bp hike. Consequent correction in risk sentiments has weighed on regional currencies and bonds. In defense and in support of domestic markets, there is a rising likelihood that the RBI might also dial up the quantum of hike at next week’s meeting", said Radhika Rao, economist at DBS Bank.

Chart of the Day | In rupee's defence, RBI's grip on forex market tightens

The Federal Reserve enacted another aggressive interest rate hike of 75 basis points to tackle inflation. The latest Fed statement included interest rate projections for the end of 2023 and 2024 that are higher than the previous forecasts, signaling the US central bank now sees the need for a more prolonged monetary tightening cycle in light of inflation trends.

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Analysts expect RBI will be under pressure amid expectations of another jumbo hike by the Fed. It also expects a 40bps hike by the RBI on its meeting scheduled this month end.

"With the current liquidity crunch which has now fallen into a deficit of over Rs. 21k crores from a Rs. 8.03 lakh surplus, inflation uncomfortably high, its going to be a challenge for RBI to manage liquidity ahead of festive season while being on a hiking spree", said CR Forex in its note.

CR Forex expects RBI unlikely to use its forex reserves to defend currency as it earlier did amid severe liquidity crunch in the market.

"Clearly there is a 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 added.

Meanwhile, Japan's central bank left its ultra loose monetary policy unchanged.

Global markets were weak also after President Vladimir Putin on Wednesday ordered Russia's first mobilisation since World War Two calling 300000 reservists and backed a plan to annex swathes of Ukraine, warning the West he was not bluffing when he said he'd be ready to use nuclear weapons to defend Russia.

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The dollar index, which measures the US currency’s strength against major currencies, was trading at 111.69, up 0.95% from its previous close of 110.64.

"We now expect another 75bps rate hike in the next meeting (November 2), followed by a 50bps rise (December 14), taking the end-2022 Fed Funds rate to 4.5%. It is conceivable that both economic and financial conditions will have tightened sufficiently by then to warrant a lengthy pause thereafter, but given the Fed officials eagerness to cool down the labour market, they may remain on the path of some additional tightening in Q1 as well. We are therefore pencilling in 50bps of further rate hikes between the February and March meetings, but only with even odds" said DBS Bank note to its investors