The rupee hit a fresh all-time low on Wednesday closing at 78.06/$, compared to the previous close of 78.00/$. On Monday, the rupee had breached the 78/$ mark and hit a record low of 78.28/$ intraday.
As per experts, the recent decline in the rupee came on the back of concerns regarding aggressive policy tightening by the US Fed, rise in US bond yields, rising inflation especially crude oil prices and continuous foreign outflows from India.
However, since the US Fed policy decision of hiking rates by 75 bps came in on expected lines, the Indian currency slightly recovered in early deals today as the US Dollar retreated. After weakening to a new all-time low close of 78.22 per dollar in the previous session, the currency surged 15 paise to 78.07 against the US dollar in early trade on today.
Still, the Indian currency continues to trade weak, below ₹78 per dollar. Let's take a look at some key factors that are dragging the rupee.
Concerns of more aggressive rate hikes in future
The US Federal Reserve raised its interest rate by 75 bps – the biggest increase since 1994 – as widely expected in its latest FOMC meet. However, experts believe that the US may need to act more aggressively to bring inflation under control. Most expect that Fed rates could reach up to 3 percent by next February.
Jerome Powell says Fed could hike rates by 0.75 again in July. He also said that Fed has tools, and 'resolve' to bring inflation down. “I do not expect moves of this size to be common, but an increase of 0.5 or 0.75 percentage points is likely at its next meeting," Powell said.
While the latest US Fed policy decision was on the expected line, concerns regarding the need for a more aggressive rate hike plan persist, which has been weighing on the Indian rupee.
US Inflation
Inflation is on the rise for most nations globally and the rise in energy prices has been one of the major contributors to this fall in the rupee. The annual pace of consumer price inflation in the US hit 8.6 percent to a 4-decade high in May as energy and food costs surged. As per brokerage house Motilal Oswal, with inflation resurgent and anything but transitory, as the easy money crowd has long been arguing, the Fed cannot easily back off to reassure investors, as it has for over three decades. Officials in the US are becoming increasingly concerned that shifting to neutral will not be enough and the Fed may have to slam on the brakes and also raise borrowing costs beyond 3 percent, it added.
"The key debate among policymakers and economists remains focused on how long high inflation will last. A few months ago, many expected the surge to be too short-lived for monetary policy to have much of an impact, with the effect of higher rates taking time to seep through into economies. However, the conflict in Ukraine — along with signs that inflationary pressures have become more broad-based — have exacerbated fears that inflation will prove stickier than hoped," MOSL explained.
Bond Yields
The US bond yields have been on a rise due to the massive surge in inflation. The rise in 10-year US bond yield is leading to the strengthening of the dollar as more funds move towards dollar assets, in turn making the rupee weaker.
"In the recent times, treasuries have been under pressure as the Fed began its long-drawn process of quantitative tightening, reducing its balance sheet by allowing bonds that it bought to mature without replacing them," noted MOSL.
FPI Outflows
Since October, foreign investors have remained net sellers in the domestic market for nine straight months. With interest rates in the US going up, FPI inflows into emerging markets like India is likely to remain muted putting more pressure on the rupee. FPI outflows since October 1, 2021, have touched Rs. 2.2 lakh crore. FPIs have sold about Rs. 1.9 lakh crore worth of Indian stocks so far this calendar year.
Crude oil prices
Rising crude oil prices have also added to the Rupee’s woes as Brent crude oil prices hit a three-month high of $125.14/barrel yesterday. Crude oil prices remaining above $120 per barrel which puts pressure on the government's annual targets. The trade deficit in May also rose to a record-high of $23.3 billion and is likely to remain elevated as commodity prices keep rising. This, in turn, is also a major headwind for the Indian rupee.
Outlook
Going ahead, experts expect the rupee to remain under pressure on the back of weak global as well as domestic trends. A breach of 78.30 levels will trigger further Rupee depreciation towards 78.55/78.75 levels, predicts domestic brokerage house Emkay.
Motilal Oswal, on the other hand, sees the rupee hitting 80 per dollar in the near future.
"Rupee could continue to feel the heat and would be weighed down if the momentum continues. Domestic fundamentals too don’t suggest that the rupee could be well supported at these all-time lows. A surge in energy prices, FIIs are net sellers and strength in the dollar index and expectation of higher government borrowing poses a vague picture for the rupee bulls. We expect the fall for rupee could extend from here as well and is headed towards 80 levels in the near future," it said.
