Rupee hits a new low on worries over hike in US interest rates

BL Mumbai Bureau | | Updated on: Jun 22, 2022

Set to weaken beyond 80 per dollar by year end, says BofA Securities

The rupee hit a fresh record low against the US dollar on Wednesday amidst growing concerns over global growth prospects and investors awaiting US Federal Reserve Chair Jerome Powell’s two-day testimony before the Congress. The weak global cues also hit benchmark equity indices as it closed over one per cent lower on Wednesday.

The BSE Sensex closed at 51,822.53, down 709.54 points or 1.35 per cent. The Nifty 50 closed at 15,413.30, down 225.50 points or 1.44 per cent.

The rupee closed at an all-time low of 78.38 against the US dollar compared to 78.07 on Tuesday even as investors are hoping to get more cues on further rate hikes and inflation trajectory from Powell’s testimony. Amidst the ongoing Russian invasion of Ukraine, the US Federal Reserve had hiked rates by an unprecedented 75 basis points. There are indications of further increase in rates.

Asian currencies under pressure

Dilip Parmar, Research Analyst, Research Analyst, HDFC Securities, said the rupee marked a fresh all-time low as risk averse sentiments, foreign fund outflows and weaker Asian currencies, following depreciation in the Japanese Yen weighed.

“The impact of a weaker Japanese Yen will add pressure on Asian currencies and indirectly put weighed on the rupee too. World over major central banks is turning hawkish to slow demand and curb inflation which could turn out to be slower growth or even recession in developed nations,” he said.

BofA Securities has revised its projections for the rupee and believes it will settle at 81 against the US dollar by December this year against its earlier projection of 79 per US dollar by this year-end. It has also revised its year-end Nifty target and expects to settle at 14,500.

“We believe the risks are still skewed towards more depreciation for the rupee as the fundamental outlook has deteriorated further primarily due to higher oil and other commodities. We have adjusted our projection higher from 79 currently to 81 INR per USD for year-end 2022,” BofA said on Wednesday. It attributed widening current account deficit, lack of interest from debt investors as some of the key reasons for this.

The Reserve Bank of India is seen to have intervened in the currency market to defend the rupee.

“The RBI appears to have intervened in the forex market when the rupee was at the day’s low of 78.38 against the US dollar, where 78.50 is the threshold mark which the RBI is defending for the rupee. Going forward too, the RBI is likely to continue intervening to curb the steep depreciation of the local unit. This is evident from the fact that the forex reserves have come down from the highs of around $642 billion and the rupee has not depreciated as much as the extent of outflows seen from the domestic markets YTD,” said Sugandha Sachdeva, Vice-President - Commodity and Currency Research, Religare Broking Ltd.

Crude cushion

Crude oil prices have corrected from the recent highs and are providing a lot of cushion to the domestic currency. Brent crude futures, the global oil benchmark, have dropped more than 13 per cent to $107.82 per barrel from the recent highs of $125.19 a barrel, she noted.

In the equities market, the breadth remained weak as 2,081 stocks declined on the BSE against 1,250 stocks that advanced. Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd, said, “Markets once again went into a plunge mode as panic-stricken investors taking cues from an early slump in European indices and weakness in other Asian gauges dumped equities, especially metal, power & realty stocks. The market is currently in a very fragile mode as any signs of weakness is prompting traders to exit stocks at will.”

Meanwhile, the RBI on Wednesday said the current account balance recorded a deficit of 1.2 per cent of GDP in 2021-22 as against a surplus of 0.9 per cent in 2020-21 as the trade deficit widened to $189.5 billion from $102.2 billion a year ago.

Published on June 22, 2022
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