Home / News / India /  Rupee moves closer to record lows against US dollar, ends at 81.87. What to expect ahead

The Indian rupee moved closer to its record lows against the US dollar on Monday due to a steep selloff in domestic equities and a rise in dollar demand from oil importers as crude prices climb significantly. The soaring crude oils and strong dollar forced the rupee down the hill offsetting the impact of RBI's 50 basis points rate hike. Also, the slowdown in manufacturing activities that hit a 3-months low in September further added to woes. In the near term, the local currency is likely to range between 81-82 levels against the dollar.

The local unit closed at 81.8725 against the greenback declining by 0.65% in the interbank forex market. The rupee dropped to the day's low of 81.9175 in today's session -- slightly shy of touching the last week's record low of 81.95 against the dollar.

According to a Reuters report, traders said the RBI sold dollars at 81.85-81.90 levels to curb the depreciation in the currency.

Brent crude and US WTI have climbed by more than 4% today after reports stated that OPEC+ is likely to consider trimming output to provide support to the recent downfall in prices.

Meanwhile, Reuters cited Sugandha Sachdeva, VP of commodity and currency research at Religare Broking views that "a significant surge in crude oil prices is leading to a lot of dollar demand by oil importers (in India) and that is weighing on the domestic currency."

On Monday, Sensex closed at 56,788.81 down by 638.11 points or 1.11%. Nifty 50 shed about 207 points or 1.21% to end at 16,887.35. The performance comes amidst feeble global cues, the decline in manufacturing PMIs, and post-RBI policy outcomes.

Vinod Nair, Head of Research at Geojit Financial Services said, "Global markets are expected to stay under pressure due to the confluence of an unfavourable economic outlook and investor risk aversion. Global markets were in pain as economic data forecast to shed lower as indicated by high-frequency indicators in European regions like UK PMI is consequently down below 50 showing contraction in economy. As demand slowed, India's manufacturing PMI declined slightly to 55.1 in September. As a result, all the key sectors were pressured by selling, except pharma & Oil stocks."

Last week on Friday, the rupee rose by 0.64% to close at 81.34 against the dollar. The domestic currency even appreciated to as much as 81.16 per dollar on this day. The uplift in the rupee was due to RBI's positive statements.

RBI made its fourth hike in repo rate by 50 basis points -- taking the key rate at 5.9% currently. This would be the third 50 basis points hike in a row so far in the current financial year. Although, overall RBI has hiked the repo rate by 190 basis points since May 2022.

The hike was on expected lines as RBI focuses on taming inflation which has been above its upper tolerance limit for the past eight consecutive months. Also, the rate hike is expected to address concerns of a weak rupee against the dollar.

What to expect in rupee ahead?

Post RBI policy, economists at HDFC Bank said, "The central bank re-iterated the resilience of India’s external balances compared to our peers in today’s policy announcement. On the rupee, as we have argued before, the RBI emphasized that their strategy would be focused on maintaining investor confidence and anchoring expectations -- signalling that FX interventions are likely to continue and be focused towards defending any extreme volatility in the rupee.

As per the economists, the absence of any additional measures in order to shore up reserves and attract capital (like was done in 2013) signals RBI’s comfort with the current level of foreign exchange reserves as well as the level of the rupee.

"Given the continued dollar rally and elevated global risks, the USD/INR pair is likely to witness continued depreciation pressures and we expect a range of 81-82 in the near term. In extreme risk-off, we continue to expect the central bank to provide support and curtail the quantum of fall in the currency," HDFC Bank economists added.

Sriram Iyer, Senior Research Analyst - Currency & Commodity at Reliance Securities said, "With regards to the policy, the RBI governor said that persistent high inflation needs further withdrawal of accommodation. However, he added that consumer price-based inflation remains elevated and possible will remain sticky and we believe that persistence of high inflation could necessitate further policy changes in the future. RBI has projected CPI Inflation at 7.1% in Q2, 6.5% in Q3, and 5.8% in Q4 of FY 2023."

However, Iyer added, "appreciation bias could be limited fight as the Fed will continue to hike another 125 bps till the end of the year as the central bank continues to press ahead to cool stubbornly high inflation. Moreover, domestic inflation will continue to remain sticky, which will prompt the central bank to remain hawkish on rates with the final terminal rate close to 6.50% to 6.75% till FY23. So, support for the USDINR spot pair is 81.20 to 80.80, while resistance is at 82.00 levels."

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