Friday May 13, 2022

The rupee hit a new low of 77.63 against the dollar as the April data on inflation in the US spooked markets, leading to expectations of more aggressive rate hikes by the Federal Reserve earlier than anticipated. The slide in the domestic currency was capped by the Reserve Bank of India (RBI), which was understood to have intervened at around the 77.60 level.

The rupee closed at 77.42 after hitting an intraday high of 77.37, supported by dollar sales by the central bank. However, the RBI was relatively less aggressive in its intervention on Thursday, according to market participants.

Dipti Chitale, senior vice president – risk management consulting at Mecklai Financial Services, said that the RBI may have intervened around the 77.60 level mainly in the spot market, but not as strongly as on Tuesday.

Experts say that there is little that the RBI can do beyond a point as a strong rupee is also detrimental to local exporters. “Since the rupee has depreciated far less than the currencies of its export competitors, the fall was long overdue,” Chitale said.

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The dollar index, which indicates the strength of the US dollar against a basket of currencies, recently surged to a 20-year high of $104.43. What is also exerting pressure on the rupee is the flight of foreign portfolio investors (FPIs) from the Indian equity markets, experts said. Stock market indices tanked sharply on Thursday, with the BSE Sensex ending more than 2% lower than its previous close.

Harsha Bangari, managing director, Export-Import (Exim) Bank of India, said that exporters stand to benefit from the depreciating rupee. “Factors like inflation and the course of monetary policy will impact the trend in the rupee. In the medium- to long-term, I see the rupee depreciating, but whether this depreciation over the current levels will happen in the immediate successive months is very difficult to say,” Bangari said.

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Smaller importers are in some danger as they may be holding a fair amount of unhedged exposures, comforted by the last two years of relative stability in the rupee, a senior banker said. “As for large companies, they generally have clear-cut hedging policies and we see them shift gears in situations like the present one. We are already seeing that happening right now,” he said.

Chitale of Mecklai Financial said that the forward premium has now eased from the over 4% level seen soon after the RBI’s rate hike to about 3.8%. “It is expected to remain flat from here on as the rate differential between India and the developed economies narrows,” she said. In the days ahead, the rupee may find some support from FPI participation in upcoming initial public offerings (IPOs).

Currency analysts at Emkay Global Financial Services said that any major rupee appreciation will be seen only below the 77 level. “The currency can hit levels of 78/78.25 levels until then,” the broking firm said.


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