The Indian rupee plunged to a record low on Friday amid a strengthening dollar and a continuous outflow of foreign funds from the local market and rising global crude oil prices. The currency slumped 11 paise on Friday to close at a fresh all-time low of 77.85 (provisional) against the US dollar. During the trading session, the domestic currency touched its lifetime low of 77.93. The rupee has lost 21 paise against the greenback during the week. The dollar index, however, rose 0.20 per cent to 103.43.
The rupee came under significant pressure since Russia had invaded Ukraine in February. The Indian currency depreciated 2.64 per cent against the dollar in the current fiscal year.
The sell-off in the domestic market in the recent weeks dragged the currency further. Foreign institutional investors have so far withdrawn Rs 2.5 trillion from domestic equities since October, 2021. The soaring crude oil prices in the aftermath Russian invasion of Ukraine and subsequent disruption in supply, added more pressure on the Indian unit.
The speculations surrounding aggressive rate hike by the US Federal Reserve lifted the US dollar index and treasury yields. Both these factors played a major role in depreciation of the domestic currency, Heena Imtiaz Naik, research analyst (currencies), Angel One Limited.
What’s Next for Rupee: Will it Drop Further?
Rupee could breach 78 against the dollar in the next few session, owing to weak fundamentals, the analysts said. “We expect the Rupee spot to cross 78 levels in the coming days owing to weak fundamentals. Elevated commodity prices, especially crude, might widen the trade deficit further, which has already widened to a record $23.3 billion in May 2022. Meanwhile, the aggressive Federal Reserve rate hike cycle ahead might amplify the capital outflows, causing the balance of payments to widen further in the current fiscal," said Jigar Trivedi, research analyst, commodities and currencies fundamental, Anand Rathi Shares & Stock Brokers.
Prospects of an intervention by the Reserve Ban of India (RBI) is what’s keeping a cap on rupee, Trivedi mentioned.
“RBI has been very vigilant in the past to lessen the damage of the rupee and even right now, RBI remains a seller at higher levels but if the pair continues to trade above 77.80-77.90, a higher rate of depreciation in the rupee cannot be ruled out," explained Viraj Vyas, technical and derivatives analyst, Ashika Group.
Investors will keenly follow the meeting of US Federal Open Market Committee scheduled on June 22. “For rupee, the key psychological level will be at 78.30. We may see rupee moving downwards once the US and its aftereffects is over," Naik added.
“We expect the USD INR (Spot) to trade with a positive bias and is gradually headed towards 78.50 levels. On the downside 77.20 will continue to act as an important support in the short term,” said Gaurang Somaiya, forex & bullion analyst, Motilal Oswal Financial Services.