Rupee hits fresh all-time low vs dollar as US rate hike worries deepen

Markets fall & crude oil declines on worries of recession in US

The rupee slumped to a fresh all-time low of 78.39 against the US dollar on Wednesday as risk appetite diminished further ahead of US Federal Reserve Chair Jerome Powell’s Congressional testimony scheduled after Indian market hours.

The equity markets, too, resumed decline after a two-session breather. The Sensex tumbled 709.54 points or 1.35 per cent to close at 51,822.53. Similarly, the Nifty50 fell 225.50 points, or 1.44 per cent to 15,413.30.  Foreign portfolio investors (FPIs) sold shares worth Rs 2,920 crore, taking their month-to-date selling tally close to Rs 45,000 crore.

Both rupee and equity benchmark indices declined sharply on the day when crude oil, too, slipped around 6 per cent amid recession fears and a push by US President Joe Biden to cut taxes on fuel in view of soaring inflation.  

With the financial markets anxiously awaiting cues regarding the future course of monetary policy tightening in the world’s largest economy, investors shunned emerging market currencies and preferred the safety of the American dollar. The rupee slipped 31 paise from Tuesday’s closing figure of 78.08. Wednesday’s closing level also marks the new record intraday low for the rupee versus the dollar; prior to this, the domestic currency had touched an intraday low of 78.28 on June 13.

After going for a 75-basis point rate hike earlier this month, the Federal Reserve is likely to raise interest rates further at its next policy meeting in July.

Powell’s comments shall help gauge the extent to which the US central bank will tighten monetary policy to combat 41-year high inflation in the country. In 2022, so far, the Fed has hiked rates by 150 bps.

The US dollar index, which measures the greenback against six major rival currencies, was at 104.54 around the Indian market closing hours. The index, which rose to a high of 104.95 during the day, had settled at 104.44 in the previous session.

Consistent purchase of the US dollar by state-owned banks, likely on behalf of oil marketing companies, dragged the rupee lower, a currency trader with a state-owned bank said.

Crude oil prices declined on Wednesday owing to steps being considered by the US administration to soften the price of the commodity. Brent crude futures were down $6.51, or 5.68 per cent, to $108.14 a barrel while US West Texas Intermediate (WTI) futures fell $6.79, or 6.2 per cent, to $102.73 by 6.45 pm IST.

Crude oil prices have surged since the start of the war in Ukraine, posing significant worries for India over the current account deficit and inflation. Foreign banks were also said to be buying dollars on behalf of overseas investors looking to reduce exposure to Indian assets, the trader said.

Higher US interest rates diminish the appeal of riskier emerging-market assets. Foreign institutional investors have turned record sellers of Indian equities this year, with their net sales so far in CY22 at Rs 2.08 trillion, NSDL data showed.

“It's a double whammy. On one hand, (policy) rates are moving up, and on the other, the domestic currency is on a weak trajectory,” India Ratings Director Soumyajit Niyogi told Business Standard.

Dealers said that while the Reserve Bank of India had likely intervened in the currency market, the central bank was looking at preventing excessive volatility rather than stopping the rupee from depreciating in the face of global headwinds. The currency dealer cited above said the RBI had likely intervened in the market through dollar sales at 78.24-78.25 levels.

Currency analysts also pointed out a sharp fall in dollar/rupee forward premia due to the aggressive pace of the Fed’s rate hikes vis-à-vis the speed at which the RBI has tightened monetary policy. Since May, the RBI has hiked the repo rate by 90 basis points.

With the interest rate differential between India and the US getting squeezed, currency dealers said currently, one-year onshore forward premia had narrowed to their lowest level since March 2019, while forward implied yields had dropped to their lowest levels since November 2011.

A strong factor cited behind the move was also the RBI’s actions in the forwards market, with the central bank said to have squared off long dollar positions.

“With forward yields quoting at the lowest levels since November 2011, the risk of carry trade unwinding and low exporter hedging can worry rupee bulls. Over the near term, we can see USDINR trade in the range of 78.00- 78.60, with an upward bias,” said Anindya Banerjee, V-P, currency derivatives & interest rate derivatives, Kotak Securities.

While the rupee took a tumble, sovereign bonds strengthened on the back of the decline in crude oil prices, especially as several trading houses had lightened their bond portfolios over the last few days, dealers said.

The yield on the 10-year benchmark government securities settled 8 basis points lower at 7.40 per cent. Bond prices and yields move inversely.