Rupee falls to new low vs US dollar with 100-bp Fed rate hike on cards

Rupee which had closed at 79.64/$ at its previous close, slipped to a low of 79.92/$ intraday

The rupee closed at 79.88 against the dollar on Thursday to hit a new low, weakening 0.3 per cent against the greenback, as a sharper-than-expected rise in US inflation stoked speculation of the Federal Reserve hiking interest rates by 100 basis points (bps) at its meeting this month.

The domestic currency, which had closed at 79.64/$ at its previous close, slipped to a low of 79.92/$ intraday.

“Rupee delayed the level of eighties, but for the time being. We expect it to break sooner,” HDFC Securities Research Analyst Dilip Parmar told Business Standard. “With markets now considering 100-bp (hike) by the Fed in July, a decisive break of parity by EUR/USD and 6.90 in Chinese yuan will lead to sharp depreciation in the Indian Rupee,” he said.

The data released on Wednesday showed that US consumer prices rose a faster-than-forecast 9.1 per cent in the year through June to a fresh forty-year high. Investors bet that the Fed was now more likely to raise interest rates by 100 bps when it meets on July 26-27. A possible 100-bp hike would be the largest increase since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s. The US central bank has already raised interest rates by 150 bps so far in 2022.

 “Everything is in play,” Atlanta Fed President Raphael Bostic told reporters in St. Petersburg, Florida, on Wednesday. Asked if that included raising rates by a full percentage point, Bostic replied, “it would mean everything.”

Cleveland Fed President Loretta Mester, speaking on Wednesday in an interview on Bloomberg Television, declined to say if she favoured going bigger at the July meeting, noting there were important data releases between now and then. But she said there was “no reason” for raising rates by less than the 75 bps that policymakers delivered last month.

Speaking in a separate interview with the New York Times also on Wednesday, San Francisco Fed Chief Mary Daly said that “My most likely posture is 0.75, because of the data I’ve seen,” adding that she had expected the CPI number to be high.

The Fed has turned aggressively against inflation, after being blamed for its initially slow response, roiling financial markets and increasing the risk that its actions could tip the US economy into recession.

Given the acceleration in monthly inflation, economists at Nomura Securities International too expect a full percentage-point increase in the Fed’s benchmark rate at the upcoming policy meeting.

“Incoming data suggests the Fed’s inflation problem has worsened, and we expect policymakers to react by scaling up the pace of rate hikes to reinforce their credibility,” Nomura said in a note.

Fed Chair Jerome Powell had told reporters last month after the central bank raised rates by 75 bps, to a range of 1.5 per cent to 1.75 per cent, that either a 50- or 75-bp increase was likely in July. A majority of his colleagues since then have either echoed his line or endorsed the bigger move.

While likely dollar sales by the Reserve Bank of India around 79.90-79.91 per dollar level had kept the rupee from breaching the psychologically significant 80/$ mark, currency traders see the local unit breaking past that level in the coming days.

Providing technical analysis, Parmar from HDFC Securities said that the breach of the 80 per dollar mark could open the path for the rupee to head to 80.90/$.

In the current week, the Indian currency has given up 0.8 per cent versus the dollar, taking the depreciation for 2022 as a whole, so far, to 6.9 per cent.

Higher US interest rates typically lead to global capital flowing out of emerging markets such as India, as investors prefer higher returns from the world’s largest economy.

So far in 2022, foreign portfolio investors have sold a net of $30.83 billion worth of Indian assets, the highest outflow on record and more than three times the net overseas sales in 2008, the year of the global financial crisis, the NSDL data showed.

Investors have flocked to the safety of the US dollar as the protracted war in Ukraine and the Fed’s aggressive rate hike plans have sparked fears of a global economic downturn.

The US dollar index, which measures the currency against six rival currencies, was last at 108.56, a twenty-year high, the Bloomberg data showed. The previous close for the index was 107.96.

While the RBI has recently announced a slew of measures to attract overseas flows and ease pressure on India’s current deficit, traders said that it would take time for foreign inflows to materialise, given the sheer scale of the global flight to the US dollar.