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Rupee falls to all-time low vs US dollar; Fed hikes, plunging equities create perfect storm – Economic Times

NEW DELHI: The rupee plunged to an all-time low versus the US dollar on Monday as a surge in US Treasury yields following an aggressive rate hike by the Federal Reserve caused the greenback to strengthen globally.

Weakness in domestic equity markets and concerns over relentless sales of Indian assets by overseas investors also dragged the Indian currency lower, dealers said.

The rupee weakened past the 77/$1 level and was last trading at 77.1325/$1. The Indian currency had closed at a record low of 76.98 on March 7.

The local unit opened at 76.9580/$1 as against 76.9150/$1 at previous close. So far in the day, the currency moved in a band of 76.9580-77.3450/$1.

The US dollar index, which measures the currency against six major currencies, was last at 103.98, stronger than 103.79 at previous close. Meanwhile, yield on the 10-year US Treasury yield jumped to 3.14 per cent, 10 basis points higher than previous close.

The market move comes after the Federal Reserve last week hiked benchmark interest rates by 50 basis points and signalled more rate increases in order to rein in high inflation.

Higher US interest rates dim the appeal of assets in riskier emerging markets such as India. Foreign institutional investors have offloaded domestic equities at a ferocious pace over the last few months, with their net sales at a whopping Rs 1.3 lakh crore so far in 2022.

A weakening rupee eats into FIIs returns from Indian assets.

While the Reserve Bank of India’s interest rate hike last week is seen as a factor supporting the rupee over the medium-term by widening the interest rate differential with the US, in the near-term the move could exert downward pressure on the rupee by leading to a stock market selloff, dealers said.

After giving up 4 per cent each last week, the BSE Sensex and the Nifty50 were trading around 2 per cent lower at 9:40 am on Monday.

The outlook on the rupee has worsened since Russia’s invasion of Ukraine in late February as the conflict in Europe has led to a surge in global crude oil prices.

This has exerted considerable upward pressure on India’s current account and inflation as the country is a massive importer of the commodity.

“We are victims of that time when the rupee is hitting an all-time- low due to multiple reasons. To describe a few points – a stronger USD, weaker Asian currencies, rebound in oil prices, ongoing Russia-Ukraine war, FII outflow, and a surprise hike by the RBI to tackle inflation could be the major reasons behind the same,” CR Forex Advisors MD Amit Pabari said.

Dealers, however, expect the RBI to prevent excessive volatility in the exchange rate through dollar sales in the foreign exchange market.

The RBI, which has FX reserves worth around $600 billion, has been aggressively selling dollars since late February in order to prevent runaway depreciation in the rupee, dealers said.

“Moving forward, RBI’s intention will be closely watched. The rupee is expected to start the fresh week at around 77.05 and is likely to trade in a wide range of 76.70 to 77.30,” Pabari said.