InvestorQ : Why did the rupee dip to a fresh low on Friday at Rs77.84?
Arya Nanda made post

Why did the rupee dip to a fresh low on Friday at Rs77.84?

Anjana Aiyar answered.
4 weeks ago

On Friday, 10th of June 2022, the Indian rupee touched a new low due to two main factors viz. dollar gaining strength and sharply higher global crude oil prices. For the day, the rupee closed at Rs77.84/dollar after scaling a high of Rs77.88/$. In between the rupee did cross the Rs78/$ level in the last few days, but this is the worst closing. The RBI has been defending the Indian rupee by selling dollars at around 78 levels.

Most currency dealers confirmed that the central bank intervention was quite strong in the foreign exchange spot dollar market, which had actually slowed the pace of the fall of the rupee. The only reason the rupee has taken support around the 78/$ levels is because the RBI has been supporting the rupee at these levels as it is a tad wary about rapid depreciation in the dollar on account of huge dependence on imported crude oil.

One reason has been the sharp strength in the US dollar which his evident in the way the dollar index or DXY on Bloomberg has rallied to above 104 in a short span of time. The dollar strength story gained more momentum after the consumer inflation in the US for the month of May 2022 came in at a 40-year high level of 8.6%. This has now raised the hackles of the Fed hiking rates by 75 bps instead of 50 bps in the June Fed meeting. That is not great news as it would strengthen the dollar further putting further pressure on the Indian rupee.

From an Indian perspective, the main reason for this sharp weakening of the rupee is also the oil price spike. It had recently spiked to above the $124/bbl levels in the global Brent market and that had also weakened the rupee since India relies for imported crude to meet nearly 85% of its crude needs on a daily basis. To an extent, India has been managing the crude spike by importing more of Russian oil at discounted rates, but that is only helping the rupee up to a point.

Geopolitical risk has been another factor in the fall of the rupee. For instance, the rupee has weakened by 2.64% against the US Dollar since April 2022. Most of the currency experts are betting on the rupee to breach 78 and perhaps even 80 soon. However, it would also depend on how long and how aggressively the RBI can intervene and stem the fall in the rupee. With its forex reserves depleting rapidly, the room for the RBI is also limited. It surely looks like tough times for the Indian rupee.