Rupee hits fresh record low for 4th straight session

Indian rupee hit a fresh record low against the US dollar for the fourth straight session on July 14 after faster-than-expected June inflation data fueled the speculations that the Federal Reserve may raise key interest rates by as much as one percentage point in the upcoming meeting. This month, the domestic currency has dropped to record lows seven times.

At 9.20am, the rupee was trading at life low of 79.77, down 0.17% from its previous close of 79.64. On the other hand, the 10 Year bond yield rose 4 basis points to 7.38 percent from its previous close of 7.338 percent. Bond yield and bond prices move in opposite directions.

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Investors bet that the US Fed is more likely than not to raise interest rates by 100 basis points when it meets on July 26-27, which would be the largest increase since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s.

"Markets seem to find themselves at an unusual crossroads as they are fretful of highflation/stagflation and yet are also stalked by recession fears. The July inflation print will likely be soft and sub 9 percent, given the recent drop in gasoline prices and falling commodity prices. But the US inflation peak may not have yet come to pass, and the YoY print may again go up later in the summer", said Madhavi Arora lead economist of Emkay.

"That said, we reckon disinflation is imminent, one way (soft-landing) or another (recession). US Fed funds rate is likely to get restrictive by end-July itself (i.e starting to hurt growth meaningfully), if it hikes more than 75bps – a case no longer elusive as it races to unmoor inflation expectations and the risk of a wage-price spiral", Arora added.

The rupee is already under pressure due to continued outflow by foreign investors amid recession fears. So far this year, FII's have sold around $29.16 billion in equities.

The recent measures by the Reserve Bank of India are unlikely to help the home currency. Recently, RBI allowed banks and traders to invoice and settle global transactions in rupees. The move is seen as a significant step towards internationalisation of the local currency.

"Since we see rupee internationalisation as a long-term structural step, we do not expect any near-term impact of this. We continue to expect the rupee to weaken moderately towards 81 to a dollar before the end of FY23", said Vivek Kumar, an economist at QuantEco Research.