Rupee is falling against US dollar but why?

The rupee has lost over six per cent against the dollar since the beginning of 2022, including an erosion of 1.97 per cent so far in June.

HIGHLIGHTS

  • The rupee’s gain on Thursday is a silver lining
  • On Wednesday, Rupee had closed at its all-time low of 79.03 against the US dollar
  • On Tuesday, the rupee plunged by 48 paise

The rupee on Thursday managed to recover from its record low hit in the previous session after gaining 13 paise to 78.90 against the US dollar. On the interbank foreign exchange today, the rupee opened at 78.92 against the American currency. In initial trade, the rupee witnessed a high of 78.90 and a low of 78.94 against the US dollar.

“Asian currencies have started mixed, but currencies could remain under pressure after Fed Chair Jerome Powell said there is a risk the US central bank’s interest rate hikes will slow the economy considerably,” Sriram Iyer, Senior Research Analyst at Reliance Securities, said, as per a PTI report.

RUPEE AT RECORD LOW

However, on Wednesday, the rupee had closed at its all-time low of 79.03 against the US dollar. The rupee slid by 18 paise and fell for the fourth straight session.

On Tuesday, the rupee plunged by 48 paise to close at a record low of 78.85 against the US dollar.

The rupee has lost 6.39 per cent against the dollar since the beginning of 2022, including an erosion of 1.97 per cent so far in June.

WHY THIS FALL?

The rupee’s fall has been mainly due to a rise in crude oil prices, a strong dollar overseas and persistent foreign capital outflows.

The backdrop of heated inflation, prolonged covid-19 lockdowns in China, the monetary tightening campaign of the key central banks, and supply chain disruptions caused by the Russia-Ukraine war have been clouding the outlook for global economic activity and have led to steep depreciation of the rupee against the dollar by over six per cent so far this year.

“The Indian rupee has continued to move on the downhill journey since the beginning of the year, amid a backdrop of heavy foreign fund outflows from the domestic markets, strength in the safe-haven dollar towards two-decade highs, and firming crude oil prices,” said Sugandha Sachdeva, Vice President – Commodity and Currency Research, Religare Broking Ltd.

“The Indian Rupee has been adversely affected mainly by the FIIs pulling out funds from the equity market, rising crude prices, the deteriorating trade balance and dollar strengthening,” analysts at Emkay Wealth Management said in a note.

Foreign institutional investors have sold local shares worth $28.4 billion so far in 2022 and dumped bonds worth $2.3 billion.

RBI INTERVENTION

The rupee on Wednesday touched record lows even as the Reserve Bank of India (RBI) sold dollars to limit losses.

The RBI could make greater use of spot market intervention – which would run down central bank reserves – or may just opt to let the rupee weaken according to macroeconomic fundamentals, analysts and traders believe, as per a Reuters report.

RUPEE VS US DOLLAR

The rupee’s gain on Thursday is a silver lining amid dark clouds of uncertainty. The question remains whether the gains will be sustained or not.

“We believe depreciation pressure on the rupee will continue to persist in FY23,” QuantEcon Research said in a note, adding that it expects ” the rupee could weaken towards 81 to a dollar before the end of FY23,” Reuters reported.

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