Rupee crosses 78/$ level for the first time and plunges to all-time low of 78.28

MUMBAI: The rupee hit a new low of 78.28 in intraday trading and closed below the 78 level for the first time on Monday as foreign investors sold in equity markets on fears that the US Fed could raise further interest rates.
A forex trader said markets were starting to price in another 75 basis point hike in U.S. interest rates.
The rupiah opened weakly, breaking through the 77 level as foreign investors sold Indian stocks. It crashed to 78.28 in intraday trade before closing at 78.04, 20 paise below Friday’s close of 77.84.
It wasn’t just the rupee, many other currencies including the Japanese yen, Australian dollar and British pound fell against the dollar. The dollar index almost touched 105, with most currencies weakening against the greenback. Bankers say that even if India’s trading partner’s currency depreciated with the rupee, imports would still be more expensive as invoicing is in dollars and most importers have no bargaining power.
On Friday, the United States reported inflation of 8.6% in May, the fastest since December 1981. The trigger for the rise in prices was the shortage caused by the Russian invasion of Ukraine and the closures of China.
“The weakening of the currency is not specific to India, the rupee still outperformed. US inflation of 8.6% spooked the markets. The market expects a bigger and faster rise in interest rates to bring real rates (inflation-adjusted interest) close to neutral,” said Ashhish Vaidya, head of treasury and markets at DBS Bank.
According to Vaidya, higher interest rates could trigger a recession due to the high level of borrowing in the world. While private borrowing is not a problem in India, high government borrowing will result in interest rates that will dampen growth. A slowdown in growth will cause inflation to pause, but supply issues will keep pressure on prices until the conflict subsides.
“Inflation may calm down a bit, but it does not go away quickly. Transmitting more fuel/coal into electricity takes time. When this happens, it can trigger utility inflation,” Vaidya said.
The increase in the value of the dollar will make all imports expensive. This will add to inflation. While a weak rupee is beneficial for exporters, the current macroeconomic environment will make it difficult for exporters to convert the favorable exchange rate into demand.
Rating agency Moody’s recently said four rated companies together hold about $2.5 billion in US dollar-rated bonds maturing over the next 12 months through May 2023. Vedanta Resources accounts for a large portion upcoming maturities, the rating agency said.

Comments are closed.