Rupee sinks to all-time low on dollar strength, FII exodus

Fed rate hike sends dollar to a two-decade high

The Indian rupee plummeted to an all-time low on Monday as the US Federal Reserve’s recent decision to raise interest rates and plans for more hikes to tame inflation pushed the dollar to its highest in 20 years, making investors move away from riskier assets and pull their money out of Asia’s third-largest economy.

Strong US jobs data on Friday also reinforced bets on further big hikes. The dollar index rose 0.087% at 103.860 after touching 104.19, its highest level since December 2002.

The rupee fell as much as 0.7% to 77.43 a dollar on Monday, making things worse for India, which has already seen an extraordinary foreign selloff this year after the war-related surge in oil prices exacerbated inflation worries tied to the country, which is the world’s No. 3 oil importer.

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“A sell-off in the global equity markets which was triggered by a hike in interest rates by the US Federal Reserve, the war in Europe and growth concerns in China due to Covid-19 surge, led to the rupee depreciation,” the analysts at Emkay Global's currency desk wrote on Monday.

Even a surprise rate hike by India’s central bank last week hasn’t been able to stem the rupee’s decline as a widening current-account deficit amplifies concerns, Bloomberg reported. A current account deficit indicates that a country is importing more than it is exporting.

"Equity markets witnessed a sharp sell-off as real rates in the U.S. turned positive and investors turned risk-averse, evaluating the need for higher rate hikes to tame the inflation going forward. Elevated crude prices and rising domestic inflation, well above RBI's upper band, might prompt further foreign institutional investors selling from domestic securities,” Jigar Trivedi, Research Analyst- Commodities Fundamental, Anand Rathi Shares & Stock Brokers, told DH.

“RBI's off-cycle meeting on May 4 did little to strengthen the rupee. Going forward, we might see the rupee spot weakening towards 77.8 levels,” Trivedi added.

Amit Pabari, Managing Director and Founder of foreign exchange consulting firm CR Forex, also blamed the perfect storm of a stronger dollar, rebound in oil prices, ongoing Russia-Ukraine war and FII outflow for the rupee depreciation.

The Reserve Bank of India has been using its forex reserves to cope with the rupee’s losses. The latest data showed that the reserve pile had dropped below $600 billion for the first time in a year, according to Bloomberg.

The dollar index, which measures the greenback against six major currencies, is up nearly 9% this year and hit its highest since late 2002 on Monday, Reuters reported.

"Moves in U.S. interest rates are not the only dollar support," Reuters reported, citing strategists at NatWest Markets. "Downside risks to global growth stemming from Ukraine and China are more pressing for Europe and Asia relative to the U.S., creating an air of 2018-style dollar exceptionalism."