Rupee downward slide expected after hawkish Fed stand, say experts

The rupee crossed 74 on Thursday, falling more than a percentage point, as the dollar registered a broad-based rally after the US Federal Reserve sounded hawkish in its meeting on Wednesday.

The partially convertible currency closed at 74.08 a dollar, which was also the lowest for the day.

It had closed at 73.3225 a dollar on Wednesday. Part of the reason for the sharp fall was that importers bought dollars in panic and stop loss was triggered, according to Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.

The rupee fell 1.02 per cent against the dollar on Thursday, behind the region’s worst loser Korean won, which fell 1.19 per cent. The dollar index, which measures the greenback’s strength against major currencies, rose 0.71 per cent to 91.78.

The rupee has been under depreciation pressure in the recent past. It was at 72.98 the dollar on June 9, and so the fall has been sharp since then. However, in absolute terms, the rupee was lowest since April 28 this year, indicating the local currency has witnessed two-way volatility, making predictions difficult.

However, the US Fed’s ‘dot plot’ showed that 13 of 18 members expected at least two rate hikes in 2023, while seven members saw the Fed rising interest rates as early as 2022.

The US Fed kept the rates unchanged, and continued with its asset purchase programme, while guiding it would communicate well in advance its rate hike decision. But it also increased the interest on excess reserves (IOER) by 5 bps to 0.15 per cent, which pushed the dollar up against major currencies and pushed up the short-term two-year treasury yield. 

This could be a turning point for the global market, experts say. And the rupee may not easily climb back to its previous 72 level easily.

According to Jamal Mecklai, senior currency consultant, there is a possibility that the rupee may cross 76 if the bias continues. Analysing technical charts, Mecklai suggested that a fall of the rupee to 73.30 would take it to 74.24 a dollar level. Once that is crossed, the next target could be 76.12.  

Imran Kazi, vice-president at Mecklai Financial, said: “After the hawkish dot plot the bias certainly would be towards gradual rupee depreciation, and any dip should be more of a correction.”

“A dip below 73 isn’t completely ruled out, but that would be difficult and not sustainable,” Kazi said.

Experts are also not ruling out the possibility of capital flows drying up, or leaving the shores. There could be a sudden capital flight in the medium term too, depending upon US Fed action.

This is precisely what the RBI has been preparing for quite some time and its formidable foreign exchange reserves of nearly $650 billion should help quell some of the currency volatility that comes in its way.

“A taper tantrum kind of event can technically happen; one cannot expect to have quantitative easing forever. Hopefully, it will be better managed than in 2013 though,” said Ananth Narayan, senior India analyst of the Observatory Group. 

The Fed’s moves may lead to some knee-jerk reaction, but there is no reason to fret, according to Anand Bagri, head of domestic market at RBL Bank. 

“The RBI has sufficient reserves. Besides, India will still be the fastest-growing nation. There is a very little chance of a sudden capital outflow, except for some hot money, maybe,” said Bagri.