Rupee breaches 79, sheds 0.9% this week as FII outflows, CAD worries grow

The rupee losses on Friday were, however, limited by dollar sales by exporters, who felt that the domestic unit may not fall much further, given the sharp depreciation seen this week

The rupee weakened against the dollar on Friday, breaching the 79 mark for the first time, as heavy outflows of overseas investment amid a worsening outlook on current account deficit prompted traders to bet against the domestic currency, dealers said.

The rupee settled at 79.04 to the greenbach from the previous close of 78.97. In the course of trade, the local currency touched a low of 79.12 per dollar. The rupee’s losses on Friday were, however, limited by dollar sales by exporters, who were of the view that the domestic currency may not fall much further from current levels, given the sharp depreciation seen this week. The rupee has depreciated 5.9 per cent against the US dollar so far in 2022.

The rupee this week shed 70 paise or 0.9 per cent versus the dollar, weakening past successive technical levels. “There was dollar buying in early trade because the bets went against the rupee once the technical resistance of 78.80 was broken. But once the rupee crossed 79 we saw a fair degree of dollar selling from exporters,” a dealer with a state-owned bank said.

The dealer sees the rupee heading to 79.20 to the dollar in the days ahead. The volatility in the domestic exchange rate this week has been driven by a renewed rise in global crude prices, a rush from traders to buy dollars and square off positions in the futures market and the unabated outflows of foreign investment. Crude prices have been volatile this week as concerns about supply shortages strengthened after the UAE said it is producing the fuel at capacity. Brent crude futures were up 2 per cent on Friday at $110 per barrel. Elevated oil prices pose risks to India’s current account deficit as the country is a major importer of the commodity. 

The outlook on the rupee has been further clouded by the likelihood of the US Federal Reserve continuing with aggressive rate hikes to stem inflation. Higher US interest rates diminish the appeal of assets in riskier emerging markets. Overseas investors have net sold $28.5 billion worth of Indian equities till date in 2022, marking the largest ever outflow on record so far, National Securities Depository Ltd data showed. The government on Friday raised the import duty on gold, a move likely aimed at reducing the pressure on the current account and the rupee. “The Indian rupee tumbled to a record low beyond 79 to the dollar amid risk-averse moods and foreign fund outflows. The government's action of increasing gold import duties as well as imposing a levy on the export of petroleum products were unable to change the direction of the rupee depreciation,” HDFC Securities Research Analyst Dilip Parmar said.

“Worries of a widening deficit, capital outflows and short supply of dollars weigh on local currency.” The analyst sees the rupee in a band of 79.30/$1 to 78.70/$1 in the near term.

While the Reserve Bank of India’s interventions in the foreign exchange market have stemmed the slide of the rupee, the domestic currency has suffered to a greater extent than most emerging market currencies this week. Dealers said that after having intervened heavily in the market through dollar sales on Tuesday – a day that the rupee slid almost 40 paise – RBI was said to have used its reserves more sparingly for the rest of the week.

“If we follow anecdotal evidence after talking to dealers, on Tuesday when the rupee made the big move of around 40 paise, the RBI was said to have sold close to $3 billion,” Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd said. Latest RBI data showed that the total foreign exchange reserves rose $2.7 billion over a week to $593.32 billion as on June 24.

Of late, the RBI has been said to have been taking advance delivery of outstanding long forward dollar positions, likely in order to shore up foreign exchange reserves.

Since the Ukraine war broke out in late February, the RBI’s headline reserves have dropped sharply as the central bank has intervened heavily in the market to curb excessive volatility. The reserves were at $631.53 as on February 25.

The current level of reserves are equivalent to nearly 10 months of imports projected for the current fiscal year, the RBI said in its Financial Stability Report, released Thursday.

“Our FX team notes that a dip in import cover towards less than 10 months saw slowed pace of intervention in 2018. We might see something similar this time too. In a nutshell the intervention strategy needs to assessed from a cycle rather a few weeks time horizon perspective,” Standard Chartered Bank’s Head of Economic Research South Asia, Anubhuti Sahay said.