Rupee falls to new low as US dollar index rises to fresh 20-year high

The rupee on Monday settled at a fresh low against the dollar as the greenback firmed up globally owing to fears of weak economic growth worldwide amid a worsening energy crisis in Europe, dealers said.

The domestic currency ended at 79.44 as against 79.25 at the previous close. The previous record closing low was 79.35 on July 5. So far in 2022, the rupee has lost 6.4 per cent against the dollar.

The US dollar index, which measures the greenback against six rival currencies, rose to a fresh 20-year high of 107.74 on Monday. The previous close was 107.01, the Bloomberg data showed.

Fears of growth slowing worldwide have intensified due to the US Federal Reserve’s aggressive plans to increase rates and tackle high inflation in the world’s largest economy. Disruptions in supply chains owing to sanctions on Russia after its invasion of Ukraine have led to severe energy shortages in Europe, worsening the outlook on growth.

Amid the broad rush to the safety of the dollar, concern over India’s widening trade deficit amid unabated outflows of overseas investment has taken a toll on the rupee.

At $25.63 billion, India recorded its highest ever monthly trade deficit in June.
 

Foreign portfolio investors have net sold Indian assets worth $30.3 billion so far in 2022, more than three times the amount in 2008, the year of the global financial crisis.

Currency traders too were jittery ahead of the release of consumer price index-based inflation for June on July 12. Headline retail inflation has remained well above the upper band of the Reserve Bank of India’s comfort zone of 2-6 per cent for several months now.

A Reuters poll estimates the June inflation reading at 7.03 per cent as against 7.04 per cent a month ago. Persistently high inflation, which has resulted in negative real interest rates, has been a key factor that has prevented overseas investors from parking funds in Indian debt over the past few months.

“The dollar rally continues as recession risks and central bank nervousness weigh on investors. The latest rally in the dollar has been a function of the weak fundamentals in Europe, the UK, and Japan,” HDFC Securities Research Analyst Dilip Parmar told Business Standard.

“There is a high chance of inflation numbers cooling in this week’s reading but they still remain above the central bank’s mandate. On the other side the current and capital account deficits are likely to be higher than the government’s initial estimates. The rupee is still having some more pain in the near term.”

The analyst sees the next technical level for the rupee at 79.90 before reaching 80. If the rupee strengthens, the range on the higher side is seen at 78.85 over the near term, Parmar said.

The weakness of the rupee comes despite the RBI announcing measures to attract greater overseas investment flows, including the provision of more room to invest in government securities.

Analysts said the measures might not attract much overseas capital till domestic inflation showed firm signs of cooling.

“The RBI has been intervening heavily in the market -- it sold $5 billion last week – but it knows when the fundamentals are showing weaknesses, there is no point in just depleting reserves,” a dealer with a state-owned bank said.

“The forex measures announced last week signal the RBI’s discomfort with the rupee’s depreciation, but till we see inflation coming down and a better real rate, long-term FPIs won’t enter debt. Today (Monday), the RBI was selling (dollars) around 79.30/$1 but not in a very large way.