PremiumThe Indian currency ended trading at 79.36 against the dollar on Tuesday after hitting a low of 79.3750. Meanwhile, the dollar index touched a 52-week high of 106.24 and oil prices rose over concerns of disruption in supply following a strike in Norway
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MUMBAI : The rupee weakened sharply to a new lifetime low against the US currency on Tuesday amid sustained dollar strength and a record June trade deficit because of rising energy and gold import costs.
The Indian currency ended trading at 79.36 against the dollar on Tuesday after hitting a low of 79.3750. The currency ended trading at 78.95 on the previous day. Meanwhile, the dollar index touched a 52-week high of 106.24 and oil prices rose over concerns of disruption in supply following a strike in Norway. Brent crude future rose to $113.73 a barrel.
With India’s trade gap widening to a record, economists now expect the country’s current account deficit to widen to more than 3% of the GDP in FY23 from 1.2% in the previous year, further weighing on the domestic currency. The country’s trade deficit swelled to a record $25.63 billion in June as soaring global commodity prices raised the cost of oil and gold imports. “A sharp sell-off in EUR-USD due to recessionary fears triggered risk-off trend across global equities. A double whammy of weak equities and a strong dollar index caused the rupee to depreciate against the dollar. Low forward premium and offshore derivatives quoting a premium over onshore are signs of unwinding of the carry trade, which is a major headwind for the rupee," said Anindya Banerjee, vice-president, currency and interest rate derivatives, Kotak Securities.
Brokerages such as Nomura expect the rupee to slide to 82 against the dollar by the third quarter of this year amid fears of accelerated foreign portfolio outflows against the backdrop of the US Federal Reserve aggressively hiking rates to rein in inflation. Indian equity markets have already seen net foreign outflows of $28.9 billion year-to-date, the second-highest among Asia ex-Japan economies, the brokerage said.
“Aggressive Fed tightening could also result in a US recession by Q4 2022 and such an environment is not conducive for EM/Asia FX that are dependent on healthy global growth and equity-related inflows, including INR," Nomura said in its report. “We are also somewhat concerned about RBI’s apparently ambivalent commitment to its 4% inflation target, which could further discourage foreign portfolio investments into the local bond market (year-to-date net foreign outflows of $2 billion). Therefore, we expect USD/INR to reach 82 by Q3 2022 and 81 by Q4 2022," it added.
While RBI has been intervening to slow down the pace of rupee depreciation, some market participants believe it should use monetary policy to stem the rupee’s slide instead of burning its $590 billion forex reserve. “The only way to counter rupee weakness for RBI is to hike interest rates with a decent possibility that the hike can also come as a surprise announcement before the next policy date," said Ritesh Bhansali, vice-president of forex risk consulting, Mecklai Financial.
