The Rupee is facing testing times in the face of a strong Dollar. The Indian unit touched an all-time intra-day low of 77.6250 per dollar on Thursday before recouping some of the losses on Reserve Bank of India’s strong intervention. 

With the US inflation hitting 8.30 per cent in April 2022 against market expectations of 8.10 per cent, the likelihood of the US Fed ramping up interest rates more aggressively has increased, pushing foreign portfolio investors (FPIs) to sell their holdings in emerging-economy financial markets, including India, and repatriating the proceeds. 

This, coupled with higher global commodity, including crude oil, prices could weaken the Indian currency. 

The rupee closed at 77.4150 per dollar, about 18 paise lower versus previous close of 77.24. 

“That the rupee closed at 77.4150 after touching an all-time intra-day low of 77.6250 is only due to RBI intervention. They sold dollars continuously.  

April CPI reading

“Now one needs to see how big an interest rate hike the RBI effects following the April CPI inflation reading of 7.79 per cent. If our interest rate lags that of advanced economies, it will be negative for our currency, as there will further FPI outflows,” said the Chief Forex Dealer of a private sector bank. 

RK Gurumurthy, Head - Treasury, Dhanlaxmi Bank, said that the Indian rupee continued its weaker course. There was evidence of intervention during the day.  

“The cues came overnight when US CPI came much higher than expectations, which triggered a tail-spin in US equities that spilled over to Asian equity markets. Although crude prices remained flat to weaker, broader dollar strength and FII selling in equities are direct causes for rupee’s weakness against the greenback,” he said. 

Rupee and its Asian counterparts

Gurumurthy emphasised that the rupee is weaker by about 4 per cent against the dollar, whereas India’s Asian counterparts are much weaker relatively. 

Chinese Yuan (CNY) has lost about 5.50 per cent after PBOC’s failed attempt to prop economy via rate cuts. Taiwan Dollar and the Won are about 7.30 per cent and 7.50 per cent weaker against the dollar.  

Further, the rupee remained flat to stronger in April in preparation for the LIC IPO flows, whereas the basket of 26 currencies saw a majority of them weakening significantly against the USD.  

“With April CPI coming in much higher than market expectations, the risk of another rate hike in June is higher. This should also help arrest Indian rupee’s unidirectional weakness while keeping volatility high,” said Gurumurthy. 

Gold and forex reserves

Meanwhile, the RBI’s holding of gold reserves increased to 760.42 metric tonnes of gold (including gold deposits of 11.08 metric tonnes) as of March-end 2022 against 695.31 metric tonnes of gold as of March-end 2021, according to RBI’s latest Half-Yearly Report on Management of Foreign Exchange Reserves. 

At the end of December 2021, foreign exchange reserve’s cover of imports (on balance of payments basis) declined to 13.1 months from 14.6 months at end-September 2021. 

The ratio of short-term debt (original maturity) to reserves, which was 16.5 per cent at end-September 2021, increased to 18.1 per cent at end-December 2021. 

The ratio of volatile capital flows (including cumulative portfolio inflows and outstanding short-term debt) to reserves increased from 64.1 per cent at end-September 2021 to 65.0 per cent at end-December 2021. 

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