The rupee fell Tuesday, closing at 78.83 per dollar for the time being, its weakest on record, marking the fifth consecutive session of record-low closes.
Rising oil costs fueled long-term inflation concerns and pushed the rupee to a new all-time low and weak over time against the dollar, after weak stocks fueled the poor performance of the US dollar. Wall Street followed overnight and the recovery in oil prices after last week’s collapse.
PTI reported that the currency fell 46 paise to close, for now, at a new all-time low of 78.83, while Bloomberg quoted the rupee at 78.7863 per dollar.
The rupee depreciated against the dollar on the interbank currency market, starting at 78.53 per dollar and ending at 78.83, 46 paise lower than Monday’s closing rate of 78.34.
Bloomberg quoted the rupee’s intraday weakness at 78.8675, while PTI reported the currency fell to 78.85 against the dollar during today’s session.
But traders said the Indian central bank’s dollar sales have contained losses.
India imports more than two-thirds of its oil needs. Increased import inflation is hurting the rupee, while exacerbating the country’s trade and current account deficits (CAD).
As supply concerns mounted on the back of political unrest in Libya and Ecuador, oil prices rocketed for a third day. It was doubtful whether major exporters Saudi Arabia and the United Arab Emirates could significantly increase production.
Although the Reserve Bank of India sold dollars through state-owned banks to slow the rapid depreciation of the rupee, dealers said the system’s demand for dollars was much stronger.
“The Indian rupee hit an all-time low against the US dollar amid weak domestic stocks and a surge in crude oil prices. Continued sales by foreign investors are also putting downward pressure on the currency,” said Anuj Choudhary – Research Analyst at Sharekhan by BNP Paribas, told PTI.
The rupee is expected to trade negatively due to risk aversion in domestic markets and continued selling pressure from foreign institutional investors (FIIs). Increased oil prices could also weigh on the domestic currency, he said.
Although the dollar index, a measure of the dollar’s performance against a basket of six different currencies, traded slightly lower on the day, the rupee struggled to break through.
Markets are re-evaluating their anticipation of the path of US Federal Reserve rate hikes. US consumer confidence data, which is expected to decline from the previous month, may provide some guidance for traders.
“Markets may also follow signs of Fed Chair Jerome Powell’s speech at the ECB forum later this week. The rupee could trade between $78 and $79.50 in the near term,” Sharekhan’s Choudhary added.
What the currency has not helped is the continued sale of Indian assets by foreign investors.
Indeed, according to stock market data, foreign institutional investors sold shares worth Rs 1,278.42 crore on Monday, turning them into net sellers in the capital market.
Analysts argue that the widening LIBOR-OIS spread is an indicator of pressure on global dollar funding, and that the RBI’s significant involvement in the futures market has exacerbated the dollar’s deficit.
With the RBI selling forward dollars rather than introducing rupee liquidity into the system, one-year onshore forward dollar premiums have fallen below 3 percent.
“Disruption in forward rates, declining currency hedging, continued high commodity prices, limited pass-through of exchange rates to inflation and increased INR valuations may prompt the RBI to refocus its currency intervention strategy,” said Madhavi Arora, an economist at Emkay Global. , Reuters told Reuters.
“Weakening the INR gradually is the right strategy, which can improve CAD space,” she added.
India’s foreign exchange reserves fell to their lowest level in more than a year, and for the third week in a row, dropping about $6 billion to about $591 billion in the week ending June 17. This is because the rupee continues to hit all-time lows.
The dollar’s overall spike, with emerging market currencies taking a harder hit, is the main driver of the decline in the country’s import coverage.
The rupee’s most recent performance and the RBI’s active participation in the spot and futures FX markets to protect the fledgling currency indicate a growing depletion of the country’s import war chest.