It is not just Western sanctions on Russia that accelerated the trend to circumvent the dollar, but the strength of the currency in the past year has also posed a challenge.
Rupee tasted yet another lifetime low on Friday morning after the US dollar index strengthened to a two-decade high this week, on hopes that demand for safe-haven currency such as the dollar would pick up.
This morning, the Rupee opened 25 paise lower from the previous session to touch a record low of 81.09 versus the US dollar, against Thursday’s close of 80.86. Yesterday’s depreciation was the biggest single-day fall for the rupee since February 24.
The US Federal Reserve had raised the repo rate by 75 basis points — which is the third consecutive hike of the same magnitude, in line with expectations, which essentially means that investors will move towards the US markets for better and stable returns amid the monetary policy tightening.
The Fed also hinted that more rate hikes were coming and that these rates would stay elevated until 2024.
The US central bank seeks to achieve maximum employment and inflation at the rate of 2 per cent over the long run and it anticipates that the ongoing hikes in the target range will be appropriate. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
Consumer inflation in the US though declined marginally in August to 8.3 per cent from 8.5 per cent in July but is way above the 2 per cent goal.
Swastika Investmart, Research Head, Santosh Meena said it was apparent from the recent action and commentary of the US Federal Reserve that it was still far away from the end of the rate hike cycle, adding he reckons that the rupee is expected to remain under pressure despite the improvement in domestic economic prospects.
Meanwhile, India’s forex reserves are at a two-year low. The reserves have dropped by almost USD 80 billion since the escalation of the Russia-Ukraine tensions into war earlier this year
India’s forex reserves have been consistently depleting for the past few months, on account of RBI’s likely intervention in the market to defend the depreciating rupee.
Typically, the RBI intervenes in the market through liquidity management, including through the selling of dollars, with a view to preventing a steep depreciation in the rupee.
A depreciation in the rupee typically makes imported items costlier.
“The Dollar Index may continue with its positive bias as the US Fed decided to raise interest rate by 75 bps, for a third consecutive month and signalled that it would continue to lift rates this year at a most rapid pace to combat inflation, which is running hot,” said ICICI Securities.