Rupee ends beyond 81 against dollar for the first time; lags EM peers

RBI may have sold around $1 bn, but experts see pace of intervention declining

The rupee witnessed a sharp 64-paise decline against the US dollar on Monday to hit a fresh low, as unabated strengthening of the greenback wreaked havoc on the financial markets across the globe.  
 

The local currency ended at 81.63 versus the dollar against the previous close at 80.99. It's for the first time that the rupee has settled the day's trade beyond the 81 mark. Intraday, it hit a low of 81.66 per dollar. 
 

So far in 2022, the rupee has depreciated 8.9 per cent versus the US dollar. 
 

Analysts expect the RBI may have sold $1 billion to calm nerves but suggest a decline in the pace of intervention.  
 

On September 21, the US Federal Reserve not only hiked rates by 75 basis points – taking the cumulative rate hike figure since March to 300 bps – but also hinted at a longer monetary tightening cycle than earlier expected.
 

With the prospect of higher interest rates sending global funds rushing to the US, the dollar index surged to a fresh 20-year high of 114.50 early on Monday. The index, which has gained 20 per cent, so far, in 2022, was at 112.12 at the end of domestic trading hours on Friday. 
 

The rupee has depreciated 2 per cent versus the dollar since September 21, making it one of the worst performing EM currencies. It has fared worse than 14 other emerging market currencies; only the South Korean won has lost more versus the dollar. Before September 21, the rupee had outperformed many of its peers, primarily on account of heavy market interventions by the RBI.
 

“I think the depreciation that is happening now is more of catch-up, because the market believed that the RBI had drawn a line in the sand at around the 80 level. Now that the level has been broken because of global triggers, the market is trying find out the next level the RBI may try to defend,” said Nitin Agarwal, head of trading at ANZ Bank.
 

“The market is taking that view that the RBI is going to revert to currency management the way it occurred around the 77 to 79 levels; which was to manage volatility. Now, with the RBI not seen defending a level so forcefully, traders are sensing a clear playing field where they can trade both ways and that’s why the depreciation is happening,” he said.
 

According to HDFC Securities’ research analyst Dilip Parmar, the rupee is seen in a band of 81.05-82.00 per dollar in the coming days. 
 

The strength in the dollar index has not only taken a toll on emerging market currencies but also on developed market currencies, such as the British pound, which on Monday hurtled to a new low, prompting a temporary trading halt on the CME. 
 

Domestic stocks took a beating, too, with the BSE Sensex and the NSE Nifty losing 1.6 per cent and 1.8 per cent, respectively.
 

With the rupee breaching successive technical levels, importers rushed to lock in dollar purchases, thereby accentuating the decline in the local currency, dealers said.
 

Market interventions by the RBI did rein in weakness in the rupee, although the central bank did not attempt to bring about a recovery in the local unit, given the sheer scale of demand for the US dollar.
 

“They are not selling through forwards as of now; they are intervening through spot. It is because of that intervention that the Indian rupee is still comparatively stable,” said Anindya Banerjee, V-P, currency derivatives & interest rate derivatives at Kotak Securities.
 

“The RBI is not trying to break down the price, for the simple reason that global markets are in a panic mode. Even if you try to break the price down (through intervention), the dollar is going to be bought. The RBI is trying to supply dollars and hold the line,” he said.
 

According to Banerjee, the central bank may have sold dollars to the tune of a little more than $1 billion on Monday. He pegged the interventions at the end of last week at $3-4 billion. Banerjee sees the rupee in a range of 80.70-82.00 per dollar in the coming days.
 

The RBI has aggressively defended the rupee through sales of the dollar since the Ukraine war broke out in late February. From $631.53 billion as on February 25, the RBI’s headline foreign exchange reserves have dropped to a near-2-year low of $545.65 billion, as on September 16.