Rupee weakens on heavy dollar demand from importers, oil marketing firms

Lower US CPI a relief, but rupee still seen testing 80/$1 on elevated CAD

The rupee surrendered the hefty gains it notched up in early trade on Thursday to close weaker against the US dollar as a spate of dollar purchases from oil-marketing companies and importers dragged down the domestic currency, dealers said.

The rupee settled at 79.64 per US dollar as against 79.52 to a dollar on Wednesday. So far in the current calendar year, the local currency has weakened 6.7 per cent against the greenback.

The rupee started the day on a strong footing, opening sharply stronger at 79.24 per dollar and then going on to touch an intra-day high of 79.21 per dollar.

The strength of the domestic currency in the early part of trade was owing to a lower-than-expected US consumer inflation reading, which led to anticipation of the Federal Reserve dialing down the pace of monetary policy tightening.

Data released late Wednesday showed that US CPI inflation increased by a lesser-than-expected 8.5 per cent in July as against a rise of 9.1 per cent in June.

While the inflation in the US remains well above the Federal Reserve’s target of 2 per cent, July’s data relieved investors as it came after months of inflation surprising on the upside in the world’s largest economy.

Traders who were earlier fearing a fresh 75-basis-point rate hike by the Federal Reserve in September now feel that the rate hike could be of a smaller quantum. So far in 2022, the US central bank has raised interest rates by 225 basis points. Higher US interest rates typically lead to a stronger dollar and outflows of global investment from emerging markets such as India.

Aggressive monetary tightening by the Fed and a rise in global commodity prices since the Ukraine war have exerted upward pressure on India’s current account deficit, clouding the outlook on the rupee.

“The lower US CPI print did trim the odds of a 75-basis point rate hike expectations in September with DXY (dollar index) cooling off below 105.00 levels. But the lower inflation figure is purely because of cooling off in oil & gas prices last month. Food and shelter costs still continue to be sticky,” said Kunal Sodhani, vice-president, Global Trading Center, Shinhan Bank.

With the rupee being unable to strengthen past the 79.20 per dollar level, imports made a beeline to lock in dollar purchases, causing the domestic currency to steadily give up gains, dealers said.

The rupee has witnessed a phase of volatility over the past month, weakening to a lifetime low of 80.06 per dollar on July 19 and then going on to strengthen past the 79 per dollar mark within the next two weeks. Firms vulnerable to currency risk have faced challenges when it comes to managing their exposure.

“There was a burst of dollar demand from importers throughout the day, especially from defence and oil companies. The rupee’s weakness was aggravated once it depreciated past 79.54 per dollar as stop-losses on dollar shorts were triggered,” a dealer with a state-owned bank said.

Shinhan Bank’s Sodhani predicted a broad range of 78.70 per dollar to 80.20 per dollar over the near term.

“USD-INR pair continue to face volatility due to thin liquidity in the market and thus flow driven moves are creating one sided large moves,” Sodhani said.

Dealers said the Reserve Bank of India was only likely to aggressively intervene in the foreign exchange market once the rupee headed closer to the 80 per US dollar mark.

Over the past few months, the central bank has shielded the rupee from runaway depreciation by selling a huge portion of its foreign exchange reserves.

The RBI’s headline foreign exchange reserves have fallen from $632 billion in late February when the Ukraine war started to $574 billion at present.