The rupee is just a hop, skip and jump away from 80 per dollar, underscoring a dramatic collapse this year in a journey which includes a breach of several key psychological levels.
That is something none expected, even in their wildest predictions at the start of 2022, when the Indian currency was trading around 74 against the greenback.
The news flow in recent months has read that the rupee hits a new all-time low almost every other day.
While the hit to the Indian currency has been lower than its peers, the impact on the broader economy from the rupee’s plunge has its pitfalls.
The notion that the Russia-Ukraine war has driven the changing landscape in global financial markets is partially true.
The development of foreign investor exodus from emerging markets and into dollar-denominated assets began once the US Federal Reserve openly acknowledged that they misjudged surging price pressures as ‘transitory’ and were behind the curve on controlling inflation at the turn of 2022.
But much of the accelerated impact has come since Russia invaded Ukraine late in February, with the rupee breaching the 77 per dollar mark for the first time ever, and the journey of its collapse since has been nothing less than dramatic.
From the 77 against the dollar to 78 and then to 79 has been swift in foreign exchange markets’ terms, with the 80 per greenback rate not too far away.
For their part, the Reserve Bank of India and the government have intervened but have not been able to stem the sharp decline.
The government has levied a gold tax on imports to help the battered rupee, and the RBI has intervened in the spot and futures forex markets by selling dollars. The central bank also announced a series of measures to increase forex inflows to boost the rupee.
Still, the RBI has repeatedly said it would intervene only to control “jerky movements” of the rupee and has largely been successful.
But in the currency environment, there is only so much a central bank can control.
Keeping in mind the limitations, the risk to currency stability remains high, and that being paramount when fighting surging inflation and higher commodity prices, the outlook looks bleak.
Add to the mix are fears of a global recession driven by inflation-fighting central banks.
During a see-saw week, the rupee closed 13 paise weaker at 79.26 against the US dollar on Friday, after hitting a record low of 79.40 against the greenback on Tuesday.
The real fear is that once the rupee breaches the 80-to-a-dollar level, the fall could be even steeper, as a key psychological rate increases bets against the free fall, as we have witnessed since the rupee weakened beyond the 77 per dollar rate.
“The rupee is expected to trade on a negative note taking cues from the strong US dollar. The dollar strengthened on hawkish Fed and optimistic statements by Fed officials assuaging fears over economic fallout of rate hike,” said Anuj Choudhary, Research Analyst at Sharekhan by BNP Paribas.
A Reuters survey of private economists and analysts showed the worst is not over for the rupee, with the currency expected to trade near its historic low in three months.
The rupee has been battered by widening trade and current account deficits and driven by a global stampede into safe-haven US dollars on rising global recession risks.
“We are now living in a volatile and high-risk environment where forecasting is all about scenarios, and with the US inflation (rate) not showing signs of peaking as of yet, the Fed is likely to deliver perhaps another 75 basis point hike, not boding well for the rupee,” Sakshi Gupta, principal economist at HDFC bank, told Reuters.
“The momentum that we have seen in the rupee is signalling that there are a lot of global pressures with the market pricing a recession, dollar getting a leg up, foreign capital outflows, plus oil and commodity prices being extremely volatile,” she added.