Rupee breaches 81 mark for a new lifetime low
23 September, 2022 | Pranay Lad
After the US dollar index rose to a two-decade high this week on optimism that demand for safe-haven currencies like the dollar would increase, the rupee saw yet another record low on Friday mornin...
After the US dollar index rose to a two-decade high this week on optimism that demand for safe-haven currencies like the dollar would increase, the rupee saw yet another record low on Friday morning.
In contrast to Thursday’s closing price of 80.86, the rupee began this morning 25 paise worse than the previous session, reaching a record low of 81.09 against the US dollar. The rupee’s devaluation yesterday was its worst one-day decline since February 24.
According to forecasts, the US Federal Reserve increased the repo rate by 75 basis points, the third straight increase of the same amount. This effectively indicates that investors would gravitate to US markets for higher and more reliable returns as a result of the tightening monetary policy.
The Fed also made hints that there will be further rate increases and that they would continue to be high until 2024.
The US central bank expects that the continuous increases in the target range will be reasonable as it works toward long-term goals of maximum employment and inflation at a rate of 2%. A weapon of monetary policy that normally works to reduce demand in the economy and lower inflation is raising interest rates.
Although it slightly decreased from 8.5 to 8.3 percent in July, consumer inflation in the US is still over the target level of 2 percent.
Santosh Meena, Research Head at Swastika Investmart, stated that despite the improvement in domestic economic prospects, the US Federal Reserve’s recent actions and commentary made it clear that the rate-hike cycle was still far from over. He also predicted that the rupee would continue to be under pressure.
India’s foreign exchange reserves are now at a two-year low. Since the Russia-Ukraine conflict turned violent earlier this year, the reserves have decreased by over USD 80 billion.
Due to the Reserve Bank of India’s (RBI) expected market intervention to preserve the weakening rupee, India’s foreign exchange reserves have been steadily declining over the past several months.
In order to stop a sharp depreciation of the rupee, the RBI typically intervenes in the market through liquidity management, including by selling dollars.
Imported goods often cost more when the rupee declines.
According to ICICI Securities, “The Dollar Index may continue with its bullish bias as the US Fed opted to raise interest rates by 75 basis points, for a third consecutive month, and signalled that it will continue to do so this year at a very fast pace to battle inflation, which is running hot.