Rupee slumps to new low as Fed hikes rates, signals longer tightening cycle

The rupee weakened sharply against the US dollar, hitting a fresh low, as the greenback surged following a 75-basis-point rate hike by the Federal Reserve. The dollar’s strength was also amplified by indications from the Fed that its rate hike cycle would continue for longer than earlier expected.

The rupee hit a new low of 80.47 versus the US dollar in the first few minutes of trade on Thursday. The domestic currency, which was trading at 80.36 per dollar at 09:15 am IST, had settled at 79.98 per dollar on Wednesday.

The previous intraday low for the rupee was 80.13 per dollar on August 29.

“Rupee has breached the previous life time and has opened on a weaker footing in line with weakness witnessed in emerging market currencies due to a Fed commentary on interest rates and inflation which is more hawkish than expected,” Mecklai Financial Services' Vice-President Ritesh Bhansali said.

“The time is set for further Dollar appreciation in the near term. We expect rupee to test 81 levels in the next few sessions with intermittent RBI intervention likely at higher levels,” he said.

Government bonds also took a beating as a sharp rise in US Treasury yields reduced the appeal of domestic fixed-income assets. Yield on the 10-year benchmark bond was last trading 6 basis points higher at 7.29 per cent. Bond prices and yields move inversely.

“The Federal Reserve has been very clear in their signalling – they want to bring inflation down even at the cost of a hard landing,” ICICI Securities Primary Dealership’s Head of Trading Naveen Singh said.

“When the Fed is so hawkish there is also pressure on the RBI to increase rate hikes, especially given the sort of beating that EM currencies are taking,” he said.

Late Wednesday, the Federal Reserve announced a 75-bps hike in interest rates, taking its total tally of rate hikes since March 2022 to 300 basis points. While the rate hike was along expected lines, what caught markets off-guard was the sharp upward revision in the median expectation of future rate hikes by members of the Fed.

“The Committee’s rate forecast ‘dots’ were revised hawkishly. Along with yesterday’s 75bp hike, Powell noted the median dots were split between 100 and 125bp of hikes still to come this year. The 2022 dots were marked up materially from June from 3.5% to 4.5%. The FOMC median now shows a terminal rate of 4.75% in 2023,” said Madhavi Arora, Emkay Global Financial’s lead economist.

Higher US interest rates lead to global funds heading to the world’s largest economy, thereby leading to a stronger dollar and exerting pressure on other currencies.

The US dollar index, which gained 0.5 per cent on Wednesday, was last at 111.61. The index was at 110.58 at 3:30 pm IST on Wednesday.

Dealers said that the RBI had stepped in to sell dollars around the 80.40 per dollar level to curb excessive volatility in the rupee. However, given tighter liquidity conditions in the banking system and the extent to which the RBI has drawn down upon its foreign exchange reserves led to speculation about the degree to which the central bank would intervene.

“This time, possibly RBI might not be able to use its FX reserves as much as it did earlier to protect rupee, as there a severe liquidity crunch in the market. Clearly there is a pressure on RBI and will be interesting to see how RBI will be able to defend rupee which is above 80.00 levels. If RBI lets rupee on its free course in line with the global peers, 80.50 to 81.00 shall be shortly seen,” CR Forex Advisors wrote.