The rupee sank to an all-time low on Monday, breaching the crucial 77 per dollar mark, despite the Reserve Bank of India’s (RBI) heavy intervention in the market as the greenback continued to gain strength against major currencies in the wake of the US Fed rate hike.

The Indian unit (INR) was also weighed down by foreign institutional investors (FIIs) cutting their equity holdings in the market, triggering fall in benchmark equity indices. With the US Fed also embarking on quantitative tightening along with rate hikes, there are now fears of FIIs pulling out their investments in emerging market economies (EMEs), including India, just like it happened during the 2013 taper-tantrum. But experts say India is far more comfortable today to provide adequate buffers to manage any significant volatility.

The rupee fell 55 paise to close at a record low of 77.4650 per dollar (USD) against the previous close of 76.9150. The previous lifetime closing low was 76.96 on March 7, 2022. A depreciating currency and rising global commodity prices, including crude oil and edible oil prices, could have negative implications for India in terms of imported inflation and widening trade and fiscal deficits.

The rupee touched a low of 77.52 in intraday trades. But RBI intervention via dollar sales helped the currency gain about 6 paise.

Inflation, a worry

“Inflation is a major worry for all countries because of supply side disruptions caused by the Russia-Ukraine war. China’s Covid-related lockdowns are adding to the supply-side worries. Amid all this, the US Fed has been aggressively hiking rates to tame multi-decade high inflation. So, dollar is becoming very strong. There will be FII outflows due to this from emerging market economies, including India, and this will weaken their currencies,” said the chief dealer of a private sector bank.

In 2022 so far, FIIs have sold equities and debt aggregating $18.265 billion and $1.392 billion, respectively. “Previously, foreign investors used to take loans and invest in India because they earned inflation-adjusted rate of return. Now, our inflation rate is up. But our interest rate is not going up in that big way compared to advanced economies.

“Foreign investors’ funding cost has increased. Our real interest rate is still negative. Therefore, it is unlikely that there will be FII inflows into our financial markets for the next 9-12 months,” said a public sector bank forex dealer.

RBI intervention

The RBI’s presence was felt continuously in the market, with interventions (dollar sales), reportedly happening at various levels 77.1250, 77.37 and 77.52. “They did not want the rupee to go beyond the 77.48 level. They protected that level,” the dealer said.

Madan Sabnavis, Chief Economist, Bank of Baroda, emphasised that this has come as a shock to the market because it did look like the RBI was defending the rupee through the swap route or actions in the forwards market to stabilise the rupee in the range of 76-77. 

“All the fundamentals are inherently on the weaker side — current account and trade deficit have been widening, FPI outflows are happening, and forex reserves have fallen below $600 billion. The dollar has been strengthening against all major currencies and this is something over which no one has control. So, we are also facing that particular backlash,” Sabnavis said. 

Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank, observed that given the uncertainty and limited RBI intervention, USD-INR could trend towards 78 levels in the immediate near term. She expects the new near term range of 76.50-78.

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