Rupee slips 41 paise to 79.36; dollar index surges to 2-decade high

Rupee may sink to 82 against dollar in Q3, high trade deficits will be the norm now, says Nomura

The rupee dropped to a new low versus the US dollar on Tuesday as sentiment for the domestic currency took a turn for the worse after trade deficit hit a record high in June.

The rupee slumped 0.5 per cent to close at a fresh low of 79.36 per US dollar on Tuesday. The previous closing low for the rupee was 79.04 per US dollar on July 1. Unabated outflows of overseas investment from Indian equity markets added to the rupee’s woes, with traders predicting fresh weakness for the currency going ahead, given the unfavourable outlook on the current account amid elevated oil prices.

“We see multiple headwinds, including weakening India BoP dynamics, aggressive Fed hikes and rising US recession risks, which should drive INR weakness in coming months, with USD/INR at 82 by Q3 2022 and 81 by Q4 2022,” Nomura said a note. 

Global oil prices, which have surged since the Ukraine war broke out in late February, hardened anew since last month as major producers made little headway with pushing up supplies amid firm demand. The rise in crude oil prices poses major upside risks to inflation and current account deficit, given that India imports more than 80 per cent of fuel needs.

“The Indian rupee marked another record low after Monday’s recovery as two factors: First, the worsened trade deficit which widened the last month amid higher commodity prices and second; capital outflows. India has witnessed record outflows of around $31 billion, so far this year,” HDFC Securities Research Analyst Dilip Parmar told Business Standard. 

The analyst predicts a low of 79.80-80 per US dollar for the rupee going ahead. The rupee has depreciated 6.3 per cent against the dollar in 2022.

Data released on Monday showed that India’s merchandise exports rose by 16.8 per cent to $37.9 billion in June 2022, while imports soared by 51.02 per cent to $63.58 leading to a record monthly trade deficit of $25.63 billion.

Dollar index at 20-year high

A surge in the US dollar index to nearly 20-year high, caused by strengthening global fears of an economic recession, also eroded appetite for emerging market currencies. The dollar index, which measures the US currency against six rival pairs, rose to 106.17 on Tuesday, its highest level since December 3, 2002. The index was at 105.14 on Monday.

“A double whammy of weak equities and strong US dollar Index caused the rupee to depreciate against the dollar. Low forward premium and offshore derivatives quoting a premium over onshore are signs of unwinding of carry trade which is a major headwind for the rupee,” Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd, said.

Banerjee sees the rupee at 78.90-79 per US dollar over the near term. 

Dealers said while the Reserve Bank of India had likely intervened in the foreign exchange market through dollar sales around the 79.2 per US dollar mark, the sheer scale of demand for the US currency had led to breaches of various technical levels. “The RBI had intervened at 79.2-79.25 levels but there was huge dollar demand today; after the rupee breached 79.3 there were literally no sellers (of dollars) in the market,” a dealer with a state-owned bank said.

“Stop-losses were triggered. We expect the RBI to intervene to prevent too much volatility but we do not expect them to reduce reserves aggressively when fundamentals warrant a depreciation,” he said.

The country’s foreign exchange reserves depleted sharply since the Ukraine war broke out as the RBI sold dollars to protect the rupee from global headwinds. The headline reserves have dropped from $631.53 billion as on February 25 to $593.32 billion as on June 24, latest data showed. The aggressive interventions have curbed the rupee’s depreciation in the face of record foreign outflows from equities. Overseas investors have net sold $29.01-billion Indian stocks so far in 2022, more than three times the outflow from Indian financial markets during the 2008 Global Financial Crisis, NSDL data showed.