The rupee has been weakening against the US dollar due to FPI outflows, rising dollar index and costlier crude oil
As the Indian market has been witnessing continuous outflows of foreign investments, the rupee has hit its record lows multiple times in the past few months. The rupee’s fall, apart from FPI outflows, has been attributed to the rising dollar index and costlier crude oil. Experts said the rupee will face challenges in the coming few months and could possibly touch 80 levels against the US dollar in the medium term.
The rupee has been on a falling streak for the past few months. The rupee had stood at 73.78 to a dollar on January 12, 2022, and since then it has fallen more than Rs 5 within less than six months and touched its all-time low of 79.11 on Friday. However, the fall has not been continuous since January 12. First, it weakened between January 12 and March 8 to hit 77.13 and then started strengthening for a month till April 5 to touch 75.23 to a dollar. Since April 5, the rupee has seen a continuous fall and has touched all-time lows multiple times since then.
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Anindya Banerjee, vice-president (currency and interest rate derivatives) of Kotak Securities, said, “Even though the Indian rupee is trading at an all-time low against the US dollar, when compared against a group of currencies, the rupee has been a slight outperformer. Aggressive intervention from RBI and interest rate hikes have helped the rupee.”
Why Has It Been Falling?
Outflows of foreign investments is a major reason for the rupee fall, which has been aggravated by global uncertainties arising out of a geopolitical crisis due to the Russia-Ukraine war and tight monetary policy by the US Federal Reserve. The fall is also attributed to surging crude oil prices and general dollar strength.
FPIs have been incessantly withdrawing money from the Indian equity market since October 2021. So far this year, the net outflow by foreign portfolio investors (FPIs) from equities has reached Rs 2.13 lakh crore. During this month till June 24, foreign investors withdrew a net amount of Rs 45,841 crore from equities.
Kotak’s Banerjee said, “Economic growth in India has been robust but global market turmoil and faster pace of Fed hikes have prevented big money from investing in India.”
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Crude oil is also remaining above $100 per barrel. Brent crude futures settled at $111.63 a barrel on Friday, rising $2.60, or 2.4 per cent. West Texas Intermediate crude (WTI) settled at $108.43 a barrel, gaining $2.67, or 2.5 per cent.
The dollar index, which gauges the greenback’s strength against a basket of six currencies, also stands at a high level of 105.13.
Rahul Kalantri, vice-president (commodities) of Mehta Equities, “We expect the dollar index to remain firm and hold its support level of 103.55 on a closing basis.”
International high commodity prices due to supply disruptions due to the Russia-Ukraine war also took a toll on the rupee as costlier imports require more dollars, which strengthens the American currency and makes the Indian currency weaker in its comparison.
Asked about the impact of the rupee fall on Indians going abroad, Banerjee said that as long as the pace of depreciation in the rupee remains slow, Indian students going abroad for studies should not get impacted significantly.
Rupee May Touch 80 Levels In Few Months
Banerjee said that over the next 6-9 months, the rupee is expected to face challenges by way of slowing global economy, tightening liquidity of the US dollar and high oil prices. “But, we expect the RBI to keep the rupee stable. However, if the dollar continues to appreciate globally, dollar-rupee will also move higher, possibly towards 80 levels.”
Mehta Equities’ Kalantri said the hawkish stance of the global central banks continues to put pressure on the rupee.
