Rupee falls to record 83.02, imported inflation is now a worry

The rupee closed 66 paise down as compared to previous close of 82.36 against the greenback. With this, the Indian currency has fallen nearly 12 per cent in the calendar year 2022. Domestic equity markets, though, ended positive, with the benchmark BSE Sensex up 0.25 per cent and the broader Nifty up 0.14 per cent.

The pressure on the rupee was primarily on account of broad dollar strength as investors turned risk averse with growing uncertainty related to Russia-Ukraine war. The dollar index was up 0.8 per cent to 112.9. The surge in inflation in developed economies like the US and the UK have increased the prospects for policy rate hikes in these countries. This could put further downward pressure on the rupee and increase imported price inflation, Fitch Ratings said.

As India has a trade deficit, the weakening rupee is expected to add to the import bill and the overall price levels in the country. While retail inflation hit 7.4 per cent in September, the RBI had said in its ‘State of the economy’ report that the fight against inflation will be dogged and prolonged as the monetary policy operates with long and variable lags.

On the other hand, the Indian market has been witnessing outflow of foreign portfolio investment (FPI) with October registering outflow of over $ one billion. “There was an outflow of $500 million from an FPI client of a bank which weighed on the rupee on Wednesday,” said Abhishek Goenka, founder and CEO, IFA Global, a forex advisory firm.

Some oil and gas companies were also seen buying dollars in the spot market, forex dealers said. What has surprised market participants is the absence of the Reserve Bank of India from the market, leading to the sudden depreciation of the rupee on Wednesday. “In the previous week, the Reserve Bank was intervening in the market but today they were not seen,” said a dealer.

The RBI recently reiterated that it does not have a target level for the exchange rate, but analysts expect the authorities will continue to use reserves to manage exchange rate volatility. This will probably erode reserve buffers further in the near term, but the impact will depend on the scale and duration of intervention. Domestic factors are the primary driver of the RBI’s current monetary policy tightening. “However, risks to our current forecast that India’s repo rate will peak at 6.0% in FY24 are skewed to the upside, as there is a significant chance of rate hikes in the US beyond those in our assumptions, which could put further downward pressure on the rupee and increase imported price inflation, according to Fitch Ratings.

The central bank had put up resistance last week to support the rupee, partly through buy and sell swaps in forwards. While this helped prevent an immediate decline in the reserves stock, the cost included sending one year forward premiums to a decade low. The authorities were monitoring domestic banks’ activity in the non-deliverable forward (NDF) markets, dissuading a build-up in additional positions, besides reportedly selling dollars in the NDF market via local banks. “The rupee’s relative outperformance is encouraging, but pressure on the Asian forex could return as the dollar resumes its march on a hawkish Fed,” said Radhika Rao, Senior Economist, DBS Bank.

Earlier this month, Elara Capital in a report said that it sees the rupee touching 83.50 level by December 2022 and 84-85 by March 2023, amid expected rise in crude oil price, depleting forex reserves and aggressive global monetary tightening cycle.

The country’s foreign exchange reserves have depleted by $109.58 billion in the last 13 months. In the week ended October 7, 2022, the country’s foreign exchange reserve stood at $532.868 billion, as per the recent RBI data. It had touched an all-time high of $642.453 billion in the week ended September 3, 2021. The RBI has always maintained that its intervention in the forex market is to check volatility and not to target a particular level of the rupee.

The reserve cover remains strong at about 8.9 months of imports in September. This is higher than during the “taper tantrum” in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress. Large reserves also provide reassurance about debt repayment capacity. Short-term external debt due is equivalent to only about 24 per cent of total reserves, Fitch Ratings said.

The domestic equity market ended positive, with the benchmark Sensex at the BSE closing at 59,107.19, up 146.5 points, or 0.25 per cent. The broader Nifty at NSE finished 25.3 points, or 0.14 per cent, high at 17,512.25.

The foreign institutional investors offloaded Rs 453.9 crore-worth shares on a net basis in the domestic capital market on Wednesday, as per the BSE provisional data.