Rupee falls below 79/$ as stocks plunge; FII outflows sour market sentiment

Higher US interest rates, upside risks to India's current account deficit, brought about by higher oil prices, have caused the rupee to depreciate 6% vs $ so far in the calendar year

The rupee fell below the 79/$ mark for the first time ever in early trade Friday as a plunge in domestic equities eroded risk appetite.

The likelihood of the US central bank continuing with aggressive rate hikes also soured the outlook on emerging market currencies, dealers said.

The rupee was last trading at 79.06/$ as against 78.97/$ at previous close. So far in the day, the domestic currency has weakened to a low of 79.10/$.

At 10:15 am IST, the BSE Sensex and the Nifty50 were each trading 1.6 per cent lower than the previous close.

With Foreign Institutional Investors (FII) showing no signs of letting up on an unprecedented spree of equity sales, currency traders fear further weakness in the rupee in coming days.

So far in 2022, FIIs have net sold $28.4 billion worth of Indian stocks, marking the largest yearly outflow on record. At $6.4 billion, the FII equity sales in June were the largest so far in the year and represented the biggest outflows since March 2020.

A rise in global oil prices early Friday also tilted the scales against the rupee.

A combination of higher US interest rates and upside risks to India’s current account deficit, brought about by elevated oil prices, has caused the rupee to depreciate 6 per cent versus the dollar so far in the calendar year.

“The fundamental risk factors remain intact as India sees the biggest FII losing streak, higher oil prices above $110/bl, hawkish Fed, rising trade deficit etc,” CR Forex Advisors said.

“We expect the rupee to trade between 78.80- 79.20 in the short term before it slowly and gradually declines further.”

Dealers now await cues on the levels at which the RBI may intervene to rein in the rupee’s depreciation. The central bank has used up more than $40 billion of its reserves since the Ukraine war broke out in February in order to curtail excessive volatility in the exchange rate.