Rupee hits new low on heavy FPI outflow

The dollar index, which gauges the greenback's strength against a basket of six currencies, strengthened by 0.05 per cent to 104.48. Investors are seen flocking to the safety of the US dollar as consumer price inflation in the UK for last month ticked to a new 40-year high of 9.1 per cent.

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Foreign portfolio investors (FPIs), who were consistently pulling money out of India over the past 8-9 months, have withdrawn around Rs 41,578 crore in June so far. They have pulled out over Rs 2,60,000 crore since last October.

The rupee on Wednesday fell by 27 paise to a record low of 78.40 against the US dollar due to unabated foreign fund outflows and losses in the stock markets amid the strengthening of the dollar abroad. With capital outflows continuing and central banks hiking rates to tame inflation, experts forecast the rupee crossing the 80 level against the dollar by the year-end.

Amid deteriorating global growth prospects, the sentiment has taken a further hit with the central banks looking to act aggressively in their battle against inflationary forces, analysts said. Foreign portfolio investors (FPIs), who were consistently pulling money out of India over the past 8-9 months, have withdrawn around Rs 41,578 crore in June so far. They have pulled out over Rs 2,60,000 crore since last October.

The dollar index, which gauges the greenback’s strength against a basket of six currencies, strengthened by 0.05 per cent to 104.48. Investors are seen flocking to the safety of the US dollar as consumer price inflation in the UK for last month ticked to a new 40-year high of 9.1 per cent.

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Market participants are looking forward to Fed Chair Jerome Powell’s two-day testimony to the Congress for further clues as to whether the US central bank is poised to deliver another large rate hike at its July meeting. “This will provide further cues for the Indian rupee going forward, which is still finding a lot of cushion around the 78.50 mark,” said Sugandha Sachdeva, vice president, Religare Broking.

The rupee has continued to depreciate beyond its expectation of a gradual trend weakness, said Bank of America (BofA) Securities. At current USD-rupee spot levels, year-end forward pricing has moved above its projection of 79 per dollar by end-2022, it said. “We believe the risks are still skewed towards more depreciation for the rupee as the fundamental outlook has deteriorated further primarily due to higher oil and other commodities. “We have adjusted our projection higher from 79 currently to 81 per dollar for year-end 2022. We, however, see the RBI’s strong reserves as a mitigating factor against tail-risks,” the agency said.

Meanwhile, the benchmark Sensex plunged 709.54 points, or 1.35 per cent, to 51,822.53 and the NSE Nifty by 225.50 points, or 1.44 per cent, to 15,413.30 due to weak global cues.

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“The short-lived pull-back rally displays the level of uncertainty in today’s market. The weakness of the global market due to quantitative tightening pulled the market down. The US Fed Chair’s testimony will be keenly watched for clues about the central banks’ future dot-plot,” said Vinod Nair, head of research, Geojit Financial Services.

BofA Securities has projected a current account deficit of 2.6 per cent of GDP in FY23, which is only partially expected to be covered by net foreign direct investment (FDI) flows of 1.3 per cent of GDP. Higher inflation relative to peers would reduce effectiveness of a gradual nominal depreciation, thus doing little to ease any concerns on relative competitiveness of the currency on REER (real effective exchange rate) basis, it said.