Rupee slips below 75 against dollar; closes at six-week low

Rupee weakened further on Friday and closed below the 75/dollar mark for the first time in 2022 after US January inflation accelerated to 40 years high of 7.5 per cent year-on-year, which spooked the global markets.

The rupee was on a weaker footing after the Reserve Bank of India (RBI) announced a ‘super dovish’ policy on Thursday, and depreciated further on Friday as the dollar strengthened globally.

“Rupee fell against the US dollar after inflation in the US rose sharply in January. US consumer prices rose solidly in January, leading to the biggest annual increase in inflation in 40 years, fuelling financial markets speculation for a big jump in interest rate from the Federal Reserve next month. Dollar has gained against its major crosses following an uptick in inflation,” Gaurang Somaiya, forex and bullion analyst, Motilal Oswal Financial Services, said.

The rupee closed below the 75/$-mark for the first time in 2022, at 75.38 as compared to Thursday’s close of 74.94. This is the domestic unit’s lowest closing since December 22, 2021. There was resistance at the

75 levels, which was breached after the US inflation numbers came in, a currency dealer said. “Broader dollar strength across the board which was there led to the rupee weakening in the morning trade,” said a dealer.

Dealers said the central bank intervention was not seen in the foreign exchange market on Friday.

The domestic currency could come under pressure in the coming days with international crude oil prices hovering above $90/bbl. High crude oil prices worsen the external position as India imports over 80 per cent of its crude oil requirement.

“We expect the dollar to trade with a positive bias and quote in the range of 75.05 and 75.80,” Somaiya said.

Among global factors, one of the major concerns is inflation, which could impact the Indian unit. Goldman Sachs has now factored in seven 25 bps interest rate hikes from the US Fed this year, up from 5 such hike predictions. The update came after January inflation figures. Domestically, crude oil prices will be one factor which will impact the rupee.

Unlike in the past when the US Fed’s taper ‘tantrums’ in 2013 resulted in a currency crisis in India, this time the situation is different. The country has much higher foreign exchange reserves —  $632 billion as compared to $275 billion — and a much smaller current account deficit. Inflation has also remained within the RBI’s target band of 2-6 per cent, albeit closer to the upper band. The central bank sees inflation cooling down from the second half of the next financial year, as it projected CPI inflation at 4.5 per cent for FY23.

According to latest RBI data, the country’s foreign reserves were close to $632 billion for the week ended February 4. Reserves have fallen around $10 billion since its peak reached in September 2021.