The Indian rupee has remained close to 80 per dollar since reaching that level last month. Since the start of the US Fed rate hike in May, the Indian rupee has lost over 4.63% and since the beginning of this year, it has fallen 7.13% against the dollar. The rupee recovered a bit in the second week of August after reports showed that inflation in the United States fell from a 40-year high. But those gains were eroded after the US Federal Reserve officials maintained their hawkish stance.
On the other hand, the dollar index has remained above the 108 level since August 19, approaching a 20-year high of 108.5 set in July.
Adding to the challenges, crude oil prices surged nearly 4% on Tuesday after Saudi Arabia flagged possible supply cuts from OPEC+ to counter downward pressure on oil prices. If crude oil prices stay above $100, it would certainly put more pressure on the rupee.
Further, India's trade deficit widened to a record $31 billion in July. According to data from the Commerce Ministry, merchandise exports declined to a five-month low at $35.2 billion in July, while imports eased sequentially to $66 billion.
The RBI is doing all it can to protect the rupee from excessive depreciation. As a result of this, the RBI's outstanding net forward purchases of US dollars fell by more than 50 percent from the last quarter of FY22 to $ 30.86 billion in the June quarter, Business Standard reported.
The purchases fell by $18.33 billion in June as the central bank intervened in both the forwards and the spot market in order to protect the rupee.
The recent data shows that nearly $69 billion has been wiped out from the record high foreign exchange reserves of $642.45 billion on September 3, 2021. However, the RBI's reserves of $573 billion remain the fifth largest in the world.
Worried about India's precarious external accounts and the weakening rupee, domestic importers are hedging a lot more of their currency exposures than they are required to, Reuters reported on Tuesday.
We have a clear view right now. Considering India's trade deficit issues and the Fed rate hike view, we think the rupee will depreciate more, possibly up to the 82 levels, "said Rohit Maheshwari, CFO of Hero International B.V.
"Our normal policy is that 50% of the exposure should be hedged. But right now, we are hedging imports by close to 80% while leaving a large part of the exports unhedged. "
Economists expect the current account deficit to widen significantly, with little or no support from investment flows.
Foreign investors have withdrawn almost $25 billion from the Indian equity and debt markets so far in 2022, as money rushes back into higher-yielding dollars, the report said.
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