Explainer: Why the rupee sank to an all time low of 78 against the US dollar today

NEW DELHI: The Indian rupee hit another record low on Monday, touching 78.20 against the US dollar on June 13.
The rupee is down 5% since January 2022 and the primary reason for this a stronger US dollar index, surging oil prices and dollar outflows from Indian equity and bond markets. Foreign institutional investors have pulled out over Rs 2,15,000 crore in the first five months of 2022, which is more than what they brought in 12 years between 2009 to 2021.
This sentiment is reflected in the equity markets too. Both the Nifty and the 30-share BSE Sensex are down over 10 percent since January.
One of the reasons behind the selloff is surging interest rates all across the world. When interest rates start rising, FIIs begin to pull out money from risky markets like India, and the rupee depreciation is adding to the concerns of foreign investors. When the US dollar appreciates, it is considered to be a negative for emerging markets.
“Weak domestic markets, rising crude oil prices, strong dollar and persistent foreign capital outflows is expected to keep the domestic currency under pressure in the week ahead,” IFA Global said in a note on Sunday.
Why has the rupee fallen?
“Rupee breached 78 today but it is not out of line with other currencies vis a vis the US dollar. Capital is flowing to safer havens like the US. Unending Ukraine war and consequent supply disruptions and spiraling oil prices have weakened growth prospects and increased cost of capital. This has lead to FIIs pulling out money and weakened the rupee,” said Astha Mago, Associate Director at Client Associates.
” The INR value has fallen over Rs. 20 in the past decade and judging from the current scenario, it might fall even further. Although India is not the only one affected in this forex situation, Asian and Central European currencies have also witnessed fluctuations. However with regard to INR, the US’s aggressive approach with its economy and India’s higher inflation projection are the main players in this transaction.The American monetary policies have seen higher rates of interest and a constrained supply of the USD. The foreign fund outflows negatively but it also affects the import of crude oil.This has already affected the stock market with Nifty and Sensex falling even further today, and will continue to disparage the Indian economy in terms of fuel prices. aggressive fiscal policies are needed for India to sustain this blow,” said Sonam Chandwani, Managing Partner, KS Legal and Associates.
The rising dollar index
The US dollar index continues to rise as it outperforms other currencies. Established in 1973, the US dollar index is used to measure the value of the US currency against the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.The value of the index is a fair indication of the dollar’s value in global markets. If the USDX goes up, that means the US dollar is gaining strength or value when compared to the other currencies.
When the value of the dollar rises, the value of all underlying assets related to the dollar also rises. These include the stocks of American companies, treasury bonds, US government bonds, currency bonds and others.
An increase in the Dollar index makes the dollar strong and depreciates the value of the Indian rupee. A weakened rupee makes imports costlier and impacts India Inc.’s profitability due to increased production costs. Increased costs lead to inflation, and the prices of goods and services rise, making finances tougher for the comman man.
“The US Dollar Index (DXY) has risen again and is poised to test the 105 levels soon. This is resulting in emerging markets (EM) currencies falling versus the dollar. Firm oil prices are adding to the pressures on these currencies. Prices result in “imported inflation” which impacts corporate profitability, FII inflows.Indian crude basket price is at 10 year highs.The INR is falling due to these cumulative global phenomena,” said Vijay Bhambwani, Head of Research Behavioral Technical analysis at Equitymaster.
How does a rupee depreciate?
“If one rupee buys more dollars, the rupee has become stronger and vice versa. As investors are selling off rupee-based investments for dollar-based ones, a rupee fall is triggered, which is the cause of the present rupee sink. As more Investors have sold off rupee based investments for dollars, rupee sank to all time low today. This may add to inflationary pressure, as India imports more as compared to exports,” said Anushkaa Arora, Principal & Founder, ABA Law Office.
Interest rates and the rupee
In response to the inflation inflation in the US, the US Federal Reserve is expected to its policy rates by around 75 basis points. When the US Fed increases the interest rates, the return on dollar assets increases compared with those of emerging markets such as India.
“When Rupee depriciates, FII’s investment value reduced that impacts the total invested amount. So to prevent further loss, FIIs sell their investment to hedge the loss,” said Sameer Jain, Managing Partner, PSL Advocates & Solicitors.
As money flows out of India, the rupee-dollar exchange rate gets impacted, depreciating the rupee. Such depreciation puts considerable pressure on the already high import prices of crude and raw materials, paving the path for higher imported inflation and production costs besides higher retail inflation.
“When the rupee falls against the US dollar there is a massive impact on import cost rising since payments are made in USD. Exports, on the other hand gain, if receipt is in USD. Imports getting expensive impacts the local cost of living riskng, causing more inflation,” added Jain.
India Ratings and Research in its note said inflation in advanced has prompted global central banks to not only withdraw the ultra-loose monetary policy but also raise their policy rates even before the RBI’s policy action on May 4, 2022. The US Fed raised Its policy rate by 25 basis points (bps) for the first time in March 2022 after a gap of more than three years and followed it with another 50 bps rate increase in May 2022.
“As expected, the monetary tightening by the US Fed has triggered a portfolio investment outflow. Till May 16, foreign portfolio investors had pulled out USD 21.2 billion from India. This, besides a higher import bill, has put sudden pressure on the Indian rupee and forex reserve,” it added.
Ind-Ra believes the Indian rupee will depreciate by 4.9 per cent and average 78.19 per USD in FY23.
Crude oil
The rupee has come under more pressure since the worsening geopolitical crisis after Russia invaded Ukraine in late February. India depends on crude oil imports to meet 85% of its energy requirements. Whenever oil prices see an uptick, it tends to pressurise the rupee as India’s import bills soar over higher crude prices. The Brent crude price on May 21 had stood around $110 a barrel, which has now jumped to $122 per barrel. In the recent policy review last week, the RBI assumed the international oil prices at $105 to estimate inflation.
“On the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, inflation is now projected at 6.7 per cent in 2022-23, with Q1 at 7.5 per cent; Q2 at 7.4 per cent; Q3 at 6.2 per cent; and Q4 at 5.8 per cent, with risks evenly balanced,” RBI Governor Shaktikanta Das said last week while presenting the monetary policy statement.
If oil prices are rising, it means imports are rising continuously. This pushes up the demand for US dollar which strengthens the dollar against rupee and Indian rupee is continuously depreciating. This erodes purchasing power of Indian currency in the international market.
FPI pullout
Foreign investors have withdrawn from Indian equity markets and pulled out close to Rs 14,000 crore in June. With this, net outflow by foreign portfolio investors (FPIs) from equities reached Rs 1.81 lakh crore in 2022.
“This is because a large part of the changeover like economic slowdown, hawkish monetary policy, supply constraints and high inflation is factored in the market prices, which was consolidating over the last 7 months. And for central banks to maintain the aggressive policy in long -term, the inflation must remain high,” said Vinod Nair, Head of Research at Geojit Financial Services, said.
Foreign flows into the equity market is one of the determing factors of the strength of the rupee. Whenever foreign investors become net sellers, the rupee depreciates. In June 2013, on fear of US Federal Reserve reducing quantitative easing, FIIs pulled out over $7.5 billion from the Indian markets, which led to the rupee plunging by 6%.
“A falling rupee affects the FIIs as it decreases their net earnings in both the stock and bond market. When a foreign investor puts Rs 60,000 in a rupee bond yielding 8% a year. At the time of investment, the US dollar was at Rs” 60. Therefore, his investment was $1,000, on which he earned $80 (at 8%) as interest. Now, if the dollar is at Rs 70 at redemption, that is, the rupee has depreciated, the value of his investment will decrease to $857. This will reduce his interest earnings to $68. The value of his investment at the end of the year will be $925, an overall loss of 7.5%. of funds. When these investors pull out their funds from the market in panic, the value of rupee may depreciate even further. This is because a lot of foreign investments will be taken out from the market with the hot money,” explains Kotak Securities.


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