Updated: May 10, 2022 6:08:01 am
Unnerving the foreign exchange market, the rupee plummeted to a record low of 77.46 against the dollar on Monday amid sustained capital outflows and strengthening of the US currency.
Making imports costlier, the rupee fell 55 paise during the day to cross the 77 level and touched an intra-day low of 77.58 before closing at 77.46 as against the previous record low of 76.98 registered on March 7. “The rupee fell to fresh all-time lows as the dollar rose broadly against its major crosses. Last week’s central bank policy action led to heightened volatility in most of the currencies. Stronger dollar and sustained upmove in global crude oil price is weighing on the overall market sentiment,” said Gaurang Somaiya, forex & bullion analyst, Motilal Oswal Financial Services.
This (the fall) has come as a shock to the market because it did look like that the RBI was defending the rupee through the swap route or actions in the forwards market to stabilise the rupee in the range of 76-77. “This was a view we also held. There was panic in the market post the Fed rate hike and the inflation fears. While this was known last week, it looks like that the market awoke to this new reality with the 10-year bond also going to the 3.1 per cent range,” said Madan Sabnavis, chief economist, Bank of Baroda.
The Sensex fell 365 points to 54,470.67 and the Nifty Index lost 0.67 per cent, or 109 points, at 16,301.85 on Monday.
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Forex reserves have now gone below $600 bn due to capital outflows and the RBI intervention. “The question is how much more can the RBI sell to defend the rupee. Will there be more swaps? Will there be more action in the forwards market? All this will matter finally. The dollar has been strengthening and this is something over which no one has control. Other currencies like baht, Turkish lira, and ringgit have fallen more sharply than the rupee while the yuan and rand have also fallen relative to the dollar, though less than the rupee,” Sabnavis said.
The fundamentals are shaky and a lot depends on how the RBI reacts and the market will be watching for its intervention. “The issue is that the market will always be guessing. If the RBI intervenes, then it will be expected to do so continuously or else the rupee will start falling. If it does not, then it will be assumed that the RBI is happy with the proceedings, and the rupee will have a free fall,” he said. Analysts said some guidance is expected from the RBI. If the rupee does not revert to a value of less than 77 in the next couple of days, the 78 level will be tested, they said. A senior RBI official has already indicated that it doesn’t want the forex reserves to fall below the $600 billion level. If the RBI gives preference to sustain the forex reserves level, there could be some more depreciation, analysts said.
The rupee is nearly 2 per cent lower from the highs of near 75.99 levels witnessed last week after the surprise rate hike by the RBI. The forex market is expecting further rate hike by the central bank and other measures to suck out liquidity from the system and tame inflation.
“India has witnessed FPI outflow of $5.8 billion in the financial year so far. Given the uncertainty and limited RBI intervention, the dollar-rupee level could trend towards 78 levels in the immediate near term,” said Upasna Bhardwaj, senior economist, Kotak Mahindra Bank.
Analysts said a sell-off in the global equity markets — triggered by hike in interest rates by the US Federal Reserve, war in Europe and growth concerns in China due to Covid-19 surge — also added to the rupee depreciation. Markets have viewed the Chinese government’s ‘zero-Covid policy’ as a major risk to global growth. The effects of the lockdown were seen as China’s export growth slowed to single digits in April as the curbs halted factory production, disrupted supply chains and triggered a collapse in domestic demand. Any policy action by the People’s Bank of China will help improve the sentiments.
China’s export growth slowed to single digits, the weakest in almost two years, while imports barely changed in April as tighter and wider Covid-19 curbs halted factory production and crimped domestic demand, adding to wider economic woes.
On Wall Street, the S&P 500 index fell to its lowest since April 2021 on Monday as higher US Treasury yields hit growth stocks. At 11:52 am ET, the Dow was down 486.39 points, or 1.48 per cent, at 32,412.98, the S&P 500 was down 93.43 points, or 2.27 per cent, at 4,029.91, and the Nasdaq was down 373.29 points, or 3.07 per cent, at 11,771.38. Meanwhile, oil prices sank over 5 per cent. Brent fell $5.92, or 5.3 per cent, to $106.47 a barrel at 1:06 pm ET.
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