The rupee weakened to its all-time low on Monday, trading above $ 77.40 a dollar, driven by security investor preferences as blockades in China, the war on Europe’s edge and fears of higher interest rates sparked a nervous market shock.
While on Friday the Indian currency ended close to its all-time low of 77.05 reached in March, today it weakened sharply and last traded at 77.42 per dollar, according to the latest quote from PTI and Reuters.
Trade from fleeing to security boosted the strength of the dollar, and offers for the dollar have been high since Russia invaded Ukraine in late February for fear of supply disruptions leading to insignificant inflation and higher global interest rates, leading to the next recession.
The dollar approached two-decade highs, gaining its fifth consecutive week after the Federal Reserve raised its fund reference rate by 50 basis points, and strong job data on Friday boosted bets on further big increases.
The futures market has a 75 percent chance of rising 75 basis points in June and a further 200 basis points this year.
Data on U.S. inflation this week and several Fed policymakers who should speak will keep hawkish rhetoric in place as Russia-Ukraine shows no signs of easing in its third month, raising expectations that the dollar will be well offered.
Net capital outflows did not help the Indian currency as foreign investors withdrew over Rs 6400 million from the Indian stock market in the first four trading meetings in May and other net sellers seven months to April 2022.
This affected the Indian currency when international crude oil prices rose sharply and traded above $ 100 on average for the third month due to supply disruptions due to the Russo-Ukrainian war.
A growing trade bill as the country imports 85 percent of its oil needs, a stronger dollar, higher crude oil prices, rising inflation and expected tighter monetary policy have scared investors.
While the RBI raised its key interest rates in an emergency meeting last week, the risks of escaping inflation are rising, although fears of a slowdown in economic growth remain.
“With central banks around the world pushing the panic button and raising interest rates. Foreign investors continue to sell relentlessly,” Vijay Singhania, president of TradeSmart, told PTI.
Despite the increase in RBI interest rates, the expected dynamics of interest rate differentials and jobs from escape to security indicate a gloomy mood.
“A series of price increases and hawkish communications have sprung up amid falling Chinese and European activity, new plans for Russia’s energy bans and continued supply-side pressures,” Barclays analysts warned, according to Reuters.
“This creates a bleak prospect of sustained inflation that is forcing central banks to raise rates despite a sharp slowdown in growth.”
Indian stock markets also started out weak in May, after losing more than 2 per cent in April. Given that inflation data for April are maturing and that international trends are not very attractive, broad feelings of investors point to an even worse side.
“We are victims of a time when the rupee is falling to its lowest level of all time for several reasons. To describe a few points – a stronger USD, weaker Asian currencies, a recovery in oil prices, the ongoing war between Russia and Ukraine, the outflow of FII and to tackle inflation could be the main reasons, ”CR Forex Advisors pointed out.
“The business report on Friday increased yields in the US, and thus the DXY (dollar index). In the future, the intentions of the RBI will be closely monitored,” added CR Forex Advisors.