Rupee at a fresh new low as rising oil deepens CAD, inflation concerns

The rupee weakened 0.5 per cent against the US dollar on Tuesday, closing at a new low, as a sharp increase in global crude oil prices stoked concerns over a widening domestic current account deficit and higher inflation, dealers said.

The rupee settled at a new low of 78.77 per US dollar against the previous close of 78.35 per US dollar.

The domestic currency touched a fresh intra-day low of 78.86 per US dollar in the course of trade. The previous record closing low for the rupee was 78.39 per US dollar on June 22.

Crude oil prices jumped close to 1 per cent in Asian trade on Tuesday after the United Arab Emirates said it was producing close to capacity, dampening hopes that the country could help to increase crude oil supplies.

Brent crude futures jumped $1.08, or 0.9 per cent, to $116.17 a barrel in early trade on Tuesday, adding to a 1.7 per cent rise in the previous session, Reuters reported.

The fresh uptick in oil prices — which comes after a sharp decline in the price of the commodity earlier this month — has led to renewed concerns over India’s trade deficit, given that the country imports more than 80 per cent of fuel needs.

Relentless overseas investment outflows from Indian equities have also played a part in the rupee’s depreciation versus the US dollar. So far in 2022, foreign investors have net sold $28.3 billion of Indian stocks. The rupee has shed 5.6 per cent versus the greenback over the same period. 
 

“The factors that have broadly pushed the rupee lower are by now well known — elevated oil prices, higher US interest rates and the pressure on India’s current account. Now, given that the dollar/rupee has broken past so many resistance levels, I wouldn’t be surprised if it goes to 79.50/$1,” said Bhaskar Panda, senior vice-president, Treasury Advisory Group, HDFC Bank.

The rupee was also under pressure in the first half of trade because traders bought dollars to close large outstanding positions in the currency futures market before the June contract expired on Tuesday, currency dealers said. “There was heavy futures buying. Because of expiry, there was huge open interest. The buying was so much that people could not cover that and then later they covered in OTC (over-the-counter),” a dealer with a state-owned bank said.

At market close, the contract still had 32,13,690 open positions with only 21.5 per cent positions closed down on Tuesday, NSE data showed.

According to dealers, while the RBI intervened in the foreign exchange market through dollar sales around 78.68 per dollar to 78.80 per dollar, the central bank’s actions did little to stem the slide in the domestic currency on Tuesday in the face of the global headwinds and the market positioning.

The RBI has intervened heavily in the foreign exchange market since the Ukraine war broke out in February in order to curb excessive volatility in the rupee. Since February 25, the headline foreign exchange reserves have declined by $40.94 billion.

As a result of the aggressive interventions by the RBI, the rupee has depreciated to a lesser extent versus the US dollar than several other emerging market currencies including the Philippine peso and the South Korean won.