InvestorQ : What are the major reasons why the rupee has suddenly become so weak and gone beyond 79/$?
Sam Eswaran made post

What are the major reasons why the rupee has suddenly become so weak and gone beyond 79/$?

Moii Chavate answered.
1 month ago

One can outline several reasons for the sharp fall in the rupee. Some are apparent and some are not so evident. Here is a quick rundown on what has led the rupee lower?

a) Ironically, an important driver of rupee weakness has been dollar strength. That is largely on the back of heavy risk off flows in favour of the US dollar assets. Now that is obvious. As Fed promised a series of rate hikes to offset inflation, the US debt paper suddenly looked a lot more alluring to global investors. In short, money was flowing out of countries like India and other EMs into the US, making the dollar stronger.

b) OK. To be fair, let us not just blame it on the dollar strength. There is also a strong reason why the rupee is weak. Look at the sharply rising trade deficit which is $70 billion for the June quarter and threatens to go closer to $280-300 billion for the full year. That is not great news, especially, when CAD is already a worry and will get only worse.

c) FPI flows have been a major reason for the rupee weakness in the recent past. Since October 2021, FPIs have sold equities worth $35 billion in India while they have sold $29 billion since the start of year 2022. Domestic flows are solid but then it is the FPI flows that really have an impact on the currency. FPI selling leads to demand for conversion to dollars and that also weakens the rupee.

d) Let me just continue for a bit longer on the subject of dollar demand. When dollar hardens, the downstream oil marketing and refining companies that procure crude become wary as they have to pay in dollars. Hence they often tend to rush for forex cover. This spikes the demand for dollars as the banks put pressure in the dollar market to buy dollars on behalf of the oil companies. This is a technical factor that often puts a lot of pressure on the Indian rupee.

e) An interesting trend is visible in the last few weeks and that is the shrinking forward premium that is paid in the rupee ready forward market for dollars. Due to low forward premiums, the demand for the rupee has also weakened and that is only making the rupee weaker. In the absence of demand amid low premiums, the rupee has taken a further hit on the demand front. That is also making a substantial dent on the rupee value.

f) RBI intervention has bene spasmodic and that has also not given confidence to the players in the forex market. For instance, RBI intervention was visible around the 78/$ levels and again around the 79/$ levels, but it was more of a formality. With the forex reserves of the RBI falling sharply from $647 billion to $590 billion, RBI can only defend the rupee up to a point. So levels of 80 or 81/$ look to be on the cards.