The Indian rupee touched a new record low and psychologically worrying mark of 80 against the dollar today. Sentiment has been hit hard for the rupee as an unprecedented surge in US inflation fortified expectations that the Federal Reserve would hike policy rates by a record margin later this month and make the dollar the highest returning safe haven currency.
The rupee fell to 80.02 in morning trade against the US dollar. For the month, the Indian unit is down 1% percent and has lost 5% percent so far in FY23.
The dollar index, which measures the greenback against a basket of six currencies, hit high of 108.58 a level last seen on 21 oct 2002, against 108.07 at previous close, according to Bloomberg data.
Also read: Rupee hits 80 mark versus dollar for first time as oil boils
Retail inflation in the US surged 9.1 percent in June, the highest in 41 months. Expectations are that the Fed would now contemplate a record 100 basis points hike in its funds rate when the committee meets later this month. The dollar has been gaining strength globally amid fears that aggressive rate hikes from the US Federal Reserve to quell inflationary pressures in the world’s largest economy could lead to a slowdown in economic growth. The Fed raised interest rates by 75 basis points during its June meeting. Fed officials have indicated that more rate hikes are on the offing until inflation shows clear signs of a pullback towards the 2 percent target. The Fed meets next on July 26-27.
US inflation data for June
Disruptions in supply chains due to sanctions on Russia after its invasion of Ukraine have led to severe energy shortages in Europe and kept commodity prices elevated. India imports nearly 85 percent of its crude oil requirements and high oil prices threaten to widen the country’s trade gap, further accentuating the rupee’s woes.
Trade deficit in June stood at $25.63 billion, the highest ever and a slowdown in the US would mean the cushion from services export may reduce. This could further widen the country’s current account deficit. Economists estimate that the current account deficit could widen above 3 percent of gross domestic product in FY23.
Amid fears of recession, a growing cause of concern for the rupee is the persistent foreign outflows from India’s equity and debt markets. Foreign investors have pulled out more than $30 billion from equity and debt markets in 2022, according to data from National Securities Depository Ltd.
The weakness in the rupee comes despite the Reserve Bank of India (RBI) announcing measures on July 6 to boost forex inflows and alleviate pressure on the rupee’s exchange rate. These included greater freedom to banks to raise foreign currency deposits from non-residents and lifting of a cap on foreign portfolio investors’ short-term investments in government and corporate debt. Forex market analysts and economists, however, do not expect these measures to materially boost inflows.
The RBI intervenes in the forex market to curb volatility in the rupee’s exchange rate. According to dealers, the central bank has been intervening in the spot and forwards market regularly to stem the rupee’s decline. India’s foreign exchange reserves fell $5 billion from $593.3 billion in the week ended June 24.
In its financial stability report released on June 30, the RBI said the current level of reserves is sufficient to meet nearly 10 months of imports projected for the current year.
RBI officials, including governor Shaktikanta Das, have repeatedly maintained that the RBI will ensure orderly moves in the rupee. While announcing the measures on July 6, the central bank had said that it had an “adequate level” of foreign exchange reserves to provide a buffer against external shocks.
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