Rupee likely to hit 78 per dollar by May-end; hits fresh all-time low

The rupee breached the psychological barrier of 77 to a dollar on Monday to hit a lifetime low of 77.46 amid the greenback strengthening against major global currencies on the back of a hawkish stance by the US Federal Reserve.

A Business Standard survey showed most respondents see the Indian unit under pressure in the near term and breaching 78 to a dollar levels before the end of the month.

The rupee, which closed 76.92 per dollar on Friday, opened weak at 77.1 after the dollar index gained to move beyond the 104-mark, with the US 10-year bond yield trading at a four-year high of 3.15 per cent.

The previous all-time low was hit on March 7, when the rupee ended the day at 76.97 to a dollar.

“The elevated US yields remain a big risk factor for emerging-market currencies like the rupee. After holding on to the 76.5-76.75 bracket, it has finally given in to reach new lows in the current move,” said Imran Kazi, vice-president-risk advisory, Mecklai Financial Services. Mecklai Financial sees the rupee hitting 78.5 to a dollar before the month end.

Currency dealers said there was sporadic intervention from the Reserve Bank of India (RBI). The intention was to cushion the fall and not to reverse the trend.

The RBI has been intervening aggressively in the foreign exchange (forex) markets by selling dollars, which resulted in forex reserves coming down by around $45 billion from their all-time high of $642 billion – reached for the week ended September 3, 2021.

The RBI is believed to maintain forex reserves of $600 billion, given the uncertainties. The latest data released by the RBI on Friday revealed the country’s forex reserves fell to $598 billion for the week ended April 29.

“The rupee looks vulnerable due to policy tightening by central banks, dollar index moving higher, RBI forex reserves falling below $600 billion, the ongoing war keeping oil prices on the higher side, and weakening Asian currencies,” said Anil Kumar Bhansali, head of treasury, Finrex Treasury Advisors.  

Although the reserves still form around 12 months of imports, they can extinguish very quickly. The RBI may be required to set some aside for a rainy day. Therefore, its interventions will be sporadic, now that 76.97 has been breached. We could see a level of 79 by the end of June,” said Bhansali, adding by end-May, the rupee could touch 78.2 to a dollar.

The Indian unit depreciated 2.16 per cent against the dollar in the current fiscal year (2022-23, or FY23), and over 4 per cent in 2021-22.

“India has witnessed foreign portfolio investment outflow of $5.8 billion in FY23. Led by adverse global cues, the rupee is trading shy of 77.5 - nearly 2 per cent lower from the highs of near 75.99 levels witnessed last week after the surprise rate hike by the RBI on May 4,” said Upasna Bhardwaj, senior economist, Kotak Mahindra Bank.

“Given the uncertainty and limited RBI intervention, the dollar-rupee could trend towards the 78 levels in the immediate near term. We expect the new dollar-rupee near-term range of 76.5-78 in the near term,” added Bhardwaj.

Global crude oil prices, trading above $113 per barrel, also put pressure on the currency, with India importing over 80 per cent of its requirements. The widening trade deficit could result in a double-digit deficit in the balance of payments for FY23, which is a negative for the currency.