Rupee near all-time low: What's wrong with the currency? Can it fall more?

Rupee's fall has been keeping investors nervous. The domestic currency fell to an all-time low of 77.53 in intraday trade before ending 55 paise lower at 77.46 per dollar on May 9, dragged by strong gains in the US dollar and foreign fund outflows.

However, the Indian unit recovered and gained about 26 paise in the morning trade on May 10. The rupee's gain might have been the result of the efforts of the Reserve Bank of India as media reports suggested that the country's central bank is intervening in all foreign-exchange markets and will continue to do so to underpin the rupee.

A Bloomberg report suggested that the RBI sees its foreign-currency reserves of about $600 billion as a formidable stockpile that it will put to use against speculators.

RBI's intervention to protect the rupee is the demand of time as the domestic currency is facing the heat of higher crude oil prices, sustained capital outflow by foreign investors and the dollar's steep rise against its peers.

Foreign investors have pulled over ₹6,400 crore from the Indian equities in the first five sessions of the month of May on the back of the RBI raising rates in a surprise move to curb inflation, data with depositories showed.

Foreign portfolio investors (FPIs) have remained net sellers for seven months from October 2021 to April 2022, withdrawing a massive amount of over ₹1.65 lakh crore from equities and this selling is putting pressure on the rupee.

In addition, Indian India's foreign exchange (FX) reserves fell below $600 billion for the first time in a year. The latest data for the April 29 ending week from the RBI showed the country's forex reserves fell by $2.695 billion to $597.728 billion, marking the eighth straight week of declines.

What's wrong with the rupee?

As mentioned above, the rupee is facing multiple headwinds in terms of higher crude oil prices, foreign fund outflow and the dollar's rise. The dollar index is hovering near 20-year highs amid fears of further aggressive interest rate hikes by the US Fed in the upcoming policy meetings.

"Higher dollar rates above $104 indicate FPI's aggressively exiting from emerging markets while higher VIX indicate no trend is sustainable and due to higher inflation, aggressive liquidity squeeze from central banks pressures rupee, making it hit an all-time low. Crude prices have also been rising for a month now making the rupee even weaker," Jateen Trivedi, Senior Research Analyst (Commodity & Currency) at LKP Securities observed.

Macro factors are also putting pressure on the rupee. While inflation led by the Ukraine war is soaring, India's April trade deficit widened to US$20 billion from US$18.7 bn in March. Exports at US$38.2 billion remained above the US$30 billion-mark for the 14th consecutive month while imports at US$58.2 billion crossed the US$50 billion-mark for the 8th consecutive month.

Rupee's health is also influenced by external factors and at present, the forex market has many concerns to deal with.

"The external sector will continue facing risks from global factors: (1) uncertainties arising from ongoing geopolitical conflicts reflecting in global commodity prices, (2) aggressive monetary policy tightness, (3) supply disruptions emanating from China’s Covid situation and (4) concerns on global stagflation trends," Kotak Securities pointed out.

The road ahead for the rupee

Trivedi sees the rupee continuing its downward journey as dollar prices rise as a major risk to prices. A relief on the rupee front can only be seen if the dollar index cools off.

"The rupee can remain weak till the time it's below 76.50. On the lower-end, it can touch 78 in the coming sessions which shall create fresh short unwinding in the dollar and making rupee even weaker," said Trivedi.

As per Rahul Kalantri, VP-Commodities, Mehta Equities, strength in the dollar index, the US bond yields and sell-off in the domestic equity markets are weighing on the rupee. Besides, the rupee is also showing weakness due to falling foreign exchange reserves and widening trade deficits. Kalantri expects the rupee to remain weak this week and could test 77.80-78.05 levels.

For the rupee, a lot will depend on how the dollar index behaves in the near term. If the US economy shows strength and if inflation does not ease, it will mean more aggressive hikes coming which will make the dollar, even more, stronger and drag the rupee to much lower levels.

Kshitij Purohit, Lead Currency at CapitalVia Global Research pointed out that the US dollar index recently broke through the 104 mark and is now attempting to build more positive momentum.

If this attempt succeeds, the US dollar index will rise towards the 104.25 resistance level, which will be bullish for USD/INR. Further, the outperformance of the US economy and lower equity prices will help the dollar," said Purohit.

This week, the focus will be on the domestic and US inflation numbers. Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services expects the USD-INR (Spot) to trade with a positive bias and quote in the range of 77.20 and 77.80.

Brokerage firm Kotak Securities underscored that given the uncertainty and limited RBI intervention, USD-INR could trend towards 78 levels in the immediate near term. The brokerage firm expects the new USD-INR range of 76.50-78 in the near term.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies and not of MintGenie.