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

The rupee settled at a new record low to the US dollar on Tuesday, as a smart rebound in global crude oil prices stoked worries about India’s current account deficit and inflation.

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

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

Government bonds too weakened due to worries over elevated domestic inflation, with the yield on the 10-year benchmark 6.54 per cent, 2032 paper closing 3 basis points 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, IST, 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 as the country 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 said to be purchasing the greenback for foreign institutional investors likely looking to exit Indian assets.

FIIs have net sold Indian stocks every single month since October 2021, with the scale of outflows comparable to that of 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 worth of domestic bonds, data released by the National Securities Depository Ltd showed.

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

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

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

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

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

While the local unit has weakened, the pace of depreciation has been slower than that of many other emerging market currencies. This is due to heavy market interventions in the form of dollar sales by RBI, dealers said.

The RBI has expended a significant portion of its foreign exchange reserves since the Ukraine war began in late February in order 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, the foreign exchange reserves have declined by $36 billion. The foreign exchange reserves touched an all-time high of $642 billion for the week ended September 3.

“With RBI’s management, the rupee shall remain in a tight range of 77.80-78.20. If the range is broken on either side, it can lead to a movement of 30 to 50 paisa,” CR Forex Advisors MD Amit Pabari said.

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