The rupee weakened to an all-time low, trading past 77.40 to the dollar
The rupee weakened to an all-time low early Monday, trading above 77.40 per dollar, driven by investors’ preference for safety as lockdowns in China, war on the edge of Europe and fear of higher interest rates sent a nervous jolt. markets.
While the Indian currency closed on Friday near all-time lows of 77.05 hit in March, it fell sharply today and was last traded at 77.42 per dollar, according to the latest PTI and Reuters quote.
Fly-to-Safe deals have driven the dollar’s strength, with orders for the US currency increasing since Russia attacked Ukraine in late February over fears of supply disruptions leading to runaway inflation and soaring global interest rates, leading to the next recession.
The dollar climbed near two-decade highs, gaining for the fifth consecutive week after the Federal Reserve raised its benchmark funds rate by 50 basis points, and strong jobs data on Friday boosted bets for more big hikes.
The futures market is pricing in prices with a 75 per cent chance of a 75 basis point hike in June and another 200 basis point rise this year.
This week’s US inflation data and several Fed policymakers scheduled to speak will keep the upbeat rhetoric in place as Russia and Ukraine in their third month show no signs of abating, reinforcing expectations that the dollar will be in good shape.
Net capital outflows have not helped the Indian currency, as foreign investors withdrew over Rs 6,400 crore from the Indian stock market in the first four trading sessions in May and net sellers remaining for seven months to April 2022.
This weighed on the Indian currency when international crude oil prices rose sharply and were trading above $100 on average for the third month due to supply disruptions from the Russo-Ukrainian war.
The widening trade bill, with the country importing 85 percent of its oil needs, a stronger dollar, higher crude oil prices, high inflation and the expectation of monetary policy tightening have all spooked investors.
While the Reserve Bank of India, in an emergency meeting last week, raised key interest rates, the risks of hyperinflation are rising even as concerns persist over slowing economic growth activity.
“With central banks around the world pressing the panic button and increasing interest rates, foreign investors continue to sell relentlessly,” Vijay Singhania, Chairman of TradeSmart, told PTI.
Despite the RBI raising interest rates, the expected dynamic interest rate differentials and flight-to-safety trades are indicative of a gloomy mood.
“A series of price hikes and hawkish communication have come against the backdrop of declining Chinese and European activity, new plans to ban Russian energy and continuing supply-side pressures,” Barclays analysts warned, Reuters reported.
“This creates the bleak prospect of persistent inflation forcing central banks to raise interest rates despite a sharp slowdown in growth.”
Indian bourses also started May on a weak note, having lost more than 2 percent in April. With inflation data due for April due and international developments unattractive, broad investor sentiment points to a further decline.
“We are victims of that time when the rupee hit all-time lows – for multiple reasons. To describe a few points – a stronger US dollar, weaker Asian currencies, a recovery in oil prices, the ongoing Russo-Ukrainian war, an influx of FII, and perhaps a sudden increase by the Reserve Bank Indian to tackle inflation are the main causes,” CR Forex Advisors noted.
CR Forex Advisors added: “Friday’s jobs report boosted the US yield and thus the DXY (Dollar Index). From now on, RBI’s intention will be closely watched.”