Explained: Why rupee fell to an all-time low of 78.29 against US dollar

FIIs' withdrawl, underperforming Asian currencies and other reasons why the rupee has declined

In early trade on June 13, the Indian rupee fell to an all-time low of Rs 78.29 against the US dollar after it slipped by 36 paise. Despite attempts by the Reserve Bank of India (RBI) to hold the rupee in the 77-78 range, Monday’s decline makes it evident that the sentiments of investors are not in India’s favor, which explains the rupee's fall. It is likely to continue on a downward trajectory. Let us take a look at the primary reasons behind this decline.

Withdrawal of foreign institutional investors (FIIs)

Indian markets have witnessed a continuous withdrawal by foreign investors since October 2021. According to data with the depositories, Rs 13,888 crore was withdrawn from Indian equities between June 1 and June 10, taking the total amount withdrawn this year close to Rs 1.81 lakh crore. According to experts, a hawkish monetary policy, high inflation and constraints in the supply chain have resulted in this withdrawal. The FIIs' exit impacts the exchange rate which ultimately results in the decline of the currency value.

Also read: Rupee slips 36 paise to hit lifetime low of 78.29 against US dollar

Poor performance by Asian currencies

Asian currencies have underperformed over the last few months. China’s Yuan hit its 18-month low in May 2022 against the US dollar, amid vigorous rounds of lockdown in Chinese cities due to Covid-19. A report by Moneycontrol shows that the weak monetary policies of Asian countries like Japan and China have resulted in their failure to stand in a battle against the US Federal Reserve. While there might not be an absolute correlation, the performance of the Chinese currency is bound to affect its Asian counterparts, including the INR.

Failed RBI interventions

Despite RBI's continuous efforts to keep the domestic currency stable, it is difficult for the central bank to keep intervening in the forex market on a regular and sustained basis. RBI tries to maintain the rupee stability by selling off dollars when the rupee is weak, but maintaining stability has been challenging. Forex experts suggest that the best bid for RBI is to slow down the pace of depreciation of the rupee.

Weak risk sentiments

The risk sentiment of investors has fallen to a large extent amid several global scenarios such as the Russia-Ukraine war and the Omicron-induced Covid-19 waves. Additionally, the surge in covid cases in India and lockdown in its neighbor China has also put investors on a back foot, thereby creating a negative sentiment in the market.