Rupee ends at record low as rebound in crude deepens CAD, inflation worries

Settles at 78.0825 to the dollar as against 77.9800 at 3:30 p.m. on Monday. The previous record closing low for the domestic currency was 78.0700 on June 17

The rupee settled at a fresh record low against the dollar on Tuesday as a rebound in global crude oil prices stoked worries over India’s current account deficit (CAD) and inflation.

A spate of overseas investment outflows from the financial markets, particularly equities, also weighed on the domestic currency, foreign exchange dealers said.

The partially-convertible rupee settled at 78.0825/$1 against 77.9800/$1 at 3:30 pm on Monday. The previous record low (closing) for the domestic currency was 78.0700/$1 on June 17.

Government bonds, too, weakened owing to the worries over elevated domestic inflation, with yield on the 10-year benchmark 6.54 per cent 2032 paper closing 3-basis points (bps) higher at 7.48 per cent. Bond prices and yields move inversely.

After plunging 7.3 per cent last week, benchmark Brent crude futures rose 1. 2 per cent on Tuesday to trade at $115.45 per barrel around 9:30 am, Reuters reported.

West Texas Intermediate Futures jumped $1.95 to trade around $111.51 per barrel.

Hardening crude oil prices add to India’s import bill and pose a significant upside risk to inflation. India is the world’s third largest importer of the commodity.

Dealers said that consistent purchases of the dollar by state-owned banks on behalf of oil marketing companies dragged the domestic currency lower.

Foreign banks were also purchasing the greenback for foreign institutional investors (FIIs) that are looking to exit Indian assets.
 

FIIs have been net sellers of Indian stocks every month since October 2021. The scale of outflows was comparable to that which occurred during the global financial crisis of 2008.

So far in 2022, FIIs have offloaded Rs 2.07 trillion worth of Indian equities and Rs 15,047 crore of domestic bonds, data released by the National Securities Depository showed.

The spate of foreign outflows has been driven primarily by higher interest rates in the US, which is battling a 40-year high inflation.

“Elevated crude oil prices, foreign fund outflows and risk-averse sentiments are a few factors that pushed the rupee to a record low,” HDFC Securities research analyst Dilip Parmar told Business Standard.

The analyst said that the domestic currency could consolidate in the coming days. From a longer-term perspective, the unfavourable trend could persist, given the turn towards higher rates by major global central banks.

“Spot dollar/rupee could trade between 77.70/$1 and 78.30/$1 in the near term while crossing 78.50/$1 will pave the way for a further upside,” he said.

The rupee has depreciated around 4.6 per cent against the dollar so far in the current calendar year.

While the local unit has weakened, the pace of depreciation, however, has been slower than many other emerging market currencies. This is owing to heavy market interventions in the form of dollar sales by the Reserve Bank of India (RBI), dealers said.

The RBI has expended a significant portion of its foreign exchange reserves since the Ukraine war began in late February. This is to prevent excessive volatility in the rupee amid surging global commodity prices.

The central bank’s headline foreign exchange reserves were at $596.46 billion as on June 10, $4.6 billion lower than the previous week, latest data showed.

Since late February, foreign exchange reserves have declined by $36 billion. Forex reserves touched an all-time high of $642 billion for the week ended September 3, 2021.

“With RBI’s management, the rupee will remain in a tight range of 77.8-78.2. If the range is broken on either side, it can lead to a movement of 30 to 50 paisa,” CR Forex Advisors managing director Amit Pabari said.