Indian rupee tests new lows on Fed rate action
Surging oil prices also weigh on the Indian currency
The Indian rupee plunged to an alltime low of 21.10 against the dirham on Monday as the dollar strength dented demand for riskier assets and foreigners continued to dump the nation’s stocks following US monetary policy tightening.
Surging oil prices have also weighed heavy on the rupee with a surprise rate hike by the Reserve Bank of India (RBI) last week doing little to stem capital outflows.
The rupee fell past its previous record low of 76.98 against the dollar (20.97 against the dirham) in March to 77.56 (21.13 against the dirham) on Monday, and is likely to touch 79 per dollar, or 21.49 against the dirham, in the absence of any serious intervention by the monetary authorities, currency experts said.
“The rupee’s all-time plunge offers NRIS better remittance rate against dirham. It will likely continue the downward trend to hit 79 against the dollar amid global and domestic challenges, including further US Fed rate hikes by end of this year,” said Sajith Kumar PK, CEO & MD, IBMC Financial
Professionals Group.
“Geopolitical concerns, latest Covid-19 lockdown movements, heavy withdrawal by foreign institutional investors from Indian stock markets, and increasing inflation in India are major challenges for the rupee. If this scenario continues, the rupee will reach 78-79 per dollar levels shortly prompting the RBI to intervene by pumping funds into the market through Domestic Institutional Investors, limiting dollar positions in derivative segments, reducing trade deficits, and reducing the outflowbygivingconfidencelevelto FIIS,” said Kumar.
Nagesh Prabhu, deputy general manager, Lulu International Exchange,
said the rupee has tested 77.52 against the dollar (21.12 against the dirham) , and is expected to fall further on account of geopolitical tensions and rising oil prices. “We feel that it might move towardsthe78mark(21.25against the dirham) in the coming days. In terms of dirham, the rupee has tested 21.10 and may test 21.20.”
The plunge of the rupee, one of the worst-performing Asian currencies in 2021, came as Indian stocks on the benchmark Sensex and Nifty50 indices extended losses for a fourth day, falling more than one per cent each on Monday before recovering ground later in the day. Foreign funds have pulled out $17.7 billion from Indian equities this year, the highest on record, as the prospect of aggressive tightening by global central banks roiled markets.
The Indian currency has also been buffeted by other headwinds including a widening current account deficit, and a surge in global crude prices. Even the RBI’S out-of-cycle rate increase last week hasn’t been able to stem the rupee’s decline.
“The RBI’S recognition of the need for urgency in normalising policy is a source of support,” BNP Paribas strategists Siddharth Mathur and Chidu Narayanan wrote in a note. “However, as equity flows can dominate interestrate sensitive flows, there is a high downside risk to the INR from a deterioration in equity market sentimentasaresultofarapidtightening in domestic financial conditions.”
Banks, metals, and oil and gas stocks declined the most, with market heavyweight, the conglomerate Reliance, losing more than three per cent following its quarterly results reported late on Friday.
Analysts said the war in Ukraine and the resurgence of Covid-19 restrictions in China have exacerbated outflows from emerging markets like India as foreign funds turn risk-averse.