Rupee hits new record low against dollar, may slide further

The dollar is strengthening because central banks, including the US Federal Reserve, have been increasing interest rates to tame inflation that’s at multi-decadal highs, resulting in a sharp inflow of funds into the world’s biggest economy.

The yield on 10-year US Treasury notes hit a fresh 14-year high even after a report showed homebuilding fell more than expected in September and the number of new groundbreakings for single-family homes tumbled to the lowest level in more than two years. US 10-year yields were up at 4.139%.

Brent crude oil prices were trading at $92.89 per barrel in the afternoon India time.

RBI intervention  

The rupee, after trading in a range of 82 to 82.70 per dollar for eight trading sessions, jumped to the 83 level on Wednesday. In the last one-and-a-half  hours of trading, the rupee plunged 60 paise from 82.43 to 83.03 per dollar.

"On the justification side, short traders who were waiting for Reserve Bank of India (RBI) intervention near 82.40-45 got trapped as the central banks remained away from the market and thus stop-losses were badly hit. Further, it was heard that there was corporate buying as well," Amit Pabari, Managing Director, CR Forex Advisors, wrote in a note.

He added that importers rushed to cover short-term payables, and exporters refrained from selling because the overall tone for the USD-INR pair has been bullish.

So far, the central bank has spent more than $100 billion of forex reserves to shield the rupee, which has fallen about 12% against the dollar this year, but RBI has been absent from the market during the most recent decline.

Some dealers said the intensity of RBI intervention will decline. Some others said they expect the central bank to continue to support the local currency because India has sufficient foreign reserves.

"We have enough reserves even after the recent decline in forex reserves to protect the rupee. We expect RBI will continue to support the rupee as hot money flows will be back next year once the Federal Reserve pauses," said Dilip Parmar, a research analyst at HDFC Securities.

In the week ended October 7, Foreign Currency Assets (FCAs), a major component of overall reserves, dropped $1.311 billion to $471.496 billion, according to the Weekly Statistical Supplement released by the central bank.

Outlook

Forex dealers expect the rupee  to remain under pressure in the near term considering the strength of greenback and higher US Treasury yields. Investor fears of a recession in the US and more rate hikes by the US Federal Reserve could again impact US Treasury yields.

"The rupee could remain under pressure against the American dollar in the near term. The broad-based strength in the greenback and higher US bond yields continue to weigh on the rupee. The bias for the Spot USD-INR remains bullish..,” Parmar said.

Sodhani added: "Inflationary pressure may continue to persist further till December-end. Feeds from Russia-Ukraine need to be under check and cannot be ignored. UK politics is another important theme which is taking centre-stage at interims."