What has been the reason for such a sharp and sudden fall in the Indian rupee?

In the last few days, the rupee has fallen to a new low of Rs77.65/$ due to a number of factors. In fact, a combination of FII selling, dollar strength, commodity inflation and delayed reaction by RBI have all led to a fall in the rupee. Here is a quick take.

· The first big reason is the dollar index which has spiked to a 20 year high of 104. With the Fed having already hiked rates by 75 bps and likely to hike by another 200 bps by end of 2022, there is a lot of hawkishness built into the dollar, leading to its relentless strengthening in relative value. That is weakening the rupee.

· FPI outflows have been a big factor. In last 7 months, FPI outflows from equity and debt combined have been more than Rs.2.05 trillion. That is a lot of money because FPI outflows also have a currency angle leading to amplification of the fall.

· Thirdly, the spike in commodity inflation has led to a lot of imported inflation into India. That is because, even today, India relies on imports for 85% of its daily oil needs. This has been the third big factor leading to rupee weakness.

· Finally, the RBI has delayed the reaction to Fed rate hikes, and that created a temporary gap leading to a fall in the rupee.