NEW DELHI – The rupee slumped to an all-time low against the US dollar on Monday as a higher-than-expected inflation reading in the world’s largest economy stoked speculation of aggressive rate hikes by the Federal Reserve, leading to global strength in the greenback.
The partially convertible rupee weakened past the 78/$1 mark for the first time ever and was last trading at 78.2130/$1. The Indian currency had settled at 77.8325/$1 on Friday.
Data released after Indian trading hours on Friday showed that US consumer price inflation jumped to a fresh forty-year high of 8.6 per cent in May, as against expectations of a rise of around 8.3 per cent.
The sharper-than-expected inflation print sent global stock markets crashing while pushing up yields on US Treasury bonds. Yield on the 10-year US Treasury bond was last at 3.19 per cent, a whopping 14 basis points higher than previous close.
Domestic equities too plummeted on Monday, further worsening the sentiment for the rupee. At 09:20 am IST, the Nifty and the Sensex were trading 2.4 per cent lower each.
The US data has left investors worried about the Fed having to adopt an even more aggressive approach towards taming inflation than it already has.
The US central bank, which has already raised interest rates by a cumulative 75 basis points since March 2022, is widely expected to raise rates by 50 bps each at its meetings in June and July.
Traders now fear that the central bank of the world’s largest economy could execute a higher quantum of rate hikes -- a process which would likely lead to global capital exiting emerging markets such as India.
Overseas investors have already been huge sellers of Indian assets over the last few months, having offloaded Rs 1.8 lakh crore worth of equities so far in 2022 while selling Rs 14,055 worth of domestic debt.
“Rupee to trade in a range of 77.80 to 78.20 as US inflation comes higher at 8.3 per cent making the expectation of a 75 basis point hike in September a reality,” Finrex Treasury Advisors Head of Treasury Anil Kumar Bhansali said.
“Exporters may sell near to 78.20 as a 40 paise gap up gives that opportunity. Importers need to wait below 78.00 to buy their near-term imports.”
Dealers now look to gauge the levels at which the Reserve Bank of India would intervene in the foreign exchange market in order to curb excessive volatility in the exchange rate.
The central bank, which at present, has headline foreign exchange reserves worth around $600 billion, has aggressively intervened in the currency market in the last few months through dollar sales.
Consequently, the rupee has fared better than several other emerging market currencies in the face of geopolitical disturbances.
“Overall, it is historically seen, that whenever the rupee breaks its all-time high, it typically moves by 1 to 1.5 rupee,” CR Forex Advisors MD Amit Pabari said.
“However, this time as the key level of 77.80 is broken in the USDINR pair, RBI might not allow the pair to move higher sharply and we expect the rupee to trade between 77.80 -78.50 in the short to medium term.”
Source Name:-Economic Times