InvestorQ : Why has the rupee been falling so relentlessly in the last few days?
prachi Patwardhan made post

Why has the rupee been falling so relentlessly in the last few days?

sara Kunju answered.
2 months ago

On 22nd June, the Indian rupee touched a life-time low of 78.39/$ ahead of the Jerome Powell testimony to the US Senate. But it was not just the testimony as other reasons included oil price spike, commodity inflation and the relentless FPI outflows. Above all, the dollar strength was doing a lot of damage. June saw nearly Rs45,000 crore of equity selling by FPIs taking the total selling in last 9 months to Rs250,000 crore. FPIs are exiting India as the fear of a global recession is pushing these investors to safer havens like the US and EU.

The US Fed hawkishness is one of the main reasons for the strength in the rupee. The US Fed is planning another 75 basis point rate hike in July and will take the rates closer to 3.50% by December 2022. That is likely to raise interest rates further and make the dollar stronger. It is the strength of the dollar that is really spooking the Indian rupee. Just look at the Bloomberg Dollar Index (DXY), which has rallied from 92 in late 2021 to a 20-year high of 105.65. Once DXY strengthens, the impact is immediately felt on the USDINR exchange rate.

Indian hedgers are adding to the pressure. There was consistent buying of US dollars by state-owned banks on behalf of oil marketing companies, which are only partially hedged. Most of them tend to be covered till Rs80/$, not beyond that and so that is where the panic starts. That is when these importers and foreign currency borrowers rush to the banks for cover and worsen the rupee situation. To add to all these factors, there is the rising crude problem, that has almost doubled in the last 8 months amidst the Ukrainian crisis.

One big question is whether and, if so, how much will the RBI intervene. RBI intervened to defend the rupee around 78/$ level but gave up against the pressure of dollar buying. Now the next level that the RBI could try and defend is 80/$. RBI is less concerned about the actual rupee/dollar levels and more about the volatility. To an extent, the RBI repo rate hikes in the last few months would partially stem this fall. But for that the next few weeks would be extremely crucial for the Indian financial markets.