NEW DELHI – After hurtling past the 77/$1 in early trade, the rupee weakened further versus the US dollar on Monday, hitting a fresh all-time low of 77.58/$1.
The partially convertible rupee was last at 77.47/$1 as against 76.9150/$1 at previous close. The previous record closing low for the Indian currency was 76.9800/$1 on March 7. So far in the day, the rupee moved in a band of 76.9580-77.5800/$1.
The key factor driving the rupee lower was a surge in the US dollar globally, following the US Federal Reserve’s 50-basis-point rate hike last week and its guidance for more rate hikes in coming months.
A relentless rise in US Treasury yields contributed to the dollar’s strength, with yield on the 10-year US Treasury note climbing around 14 basis points over the last couple of days. The 10-year US yield was last at 3.17 per cent.
Weakness in domestic equities also pulled down the rupee, dealers said.
The US dollar index, which measures the currency against six major currencies, broke past the 104 level and was near 20-year highs at 104.07. The index, which has skyrocketed 8 per cent, so far in 2022, had closed at 103.79 in the previous session.
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.
“Rupee spot plunged to a record lows, tracking weakness in Asian peers amid a stronger dollar index and surging treasury yields in US,” Royce Vargheese Joseph – Research Analyst – Currency and Energy, Anand Rathi Shares and Stock Brokers said.
“Elevated crude prices and rising domestic inflation, well above RBI’s upper band, might prompt further FII selling from domestic securities. Meanwhile, RBI’s off cycle meeting on May 4 did little to strengthen the Rupee. Going forward, we might see Rupee spot weakening towards 77.8 levels.”
The Reserve Bank of India last week raised interest rates, with Governor Shaktikanta Das announcing the move after an unscheduled meeting of the Monetary Policy Committee.
Some analysts were of the view that the central bank had acted to protect the rupee amid interest rates heading higher at an aggressive pace in the US and huge FII outflows.
“With the spread between the US Fed rate and the RBI repo rate narrowing to 300bp the RBI may have decided to do a preemptive hike given that it has run down its forex reserves to USD 600bn, down USD42bn since the Oct’21 peak,” JM Financial Institutional Securities MD & Chief – Strategist Dhananjay Sinha wrote last week.
“India’s trade deficit has widened to USD 18-20bn (Mar-Apr’22) and capital flows have declined, specially FII flows (USD 20bn since Apr’21). Hence, the rate hikes ahead of the Fed’s announcement appears to be aimed at preventing a steep depreciation in INR/USD in the wake of continued strength in the US dollar index.”