Rupee hits all-time low on US rate hike fears

Rupee breaches the 82-mark against the dollar for the first time

The Indian rupee dived to a record low against the dollar on Friday on fresh concerns over the US Federal Reserve’s interest rate outlook.

The steep fall came a day after many Fed officials showed support to extend their run of interest-rate hikes to fight inflation. Five officials highlighted that inflation was too high and financial market volatility would not deter them from raising rates further.

That made the rupee breach the 82-mark against the dollar for the first time, forcing the Reserve Bank of India to sell dollars to control the damage.

“Fed Reserve Members are indicating from their statement that they will continue to hike the interest rate even if they go into a recession,” said Megh Mody, a commodities and currencies analyst at Prabhudas Lilladher.

Their hawkish comments pushed the dollar index higher, piling pressure on the rupee. A weak rupee makes imports costlier, pushes up India’s oil bill and widens its current account deficit. It also makes studying and travelling abroad costlier, among other things.

Fed officials are in the middle of their most aggressive tightening campaign since the 1980s to tackle inflation near four-decade highs. Starting near zero in March, they’ve increased their benchmark rate to a target range of 3 per cent to 3.25 per cent, including with back-to-back 75 basis-point hikes at their last three meetings, Bloomberg reported.

Mody said there were chances for another 75 bps hike at the November Fed meeting, which could push the rupee lower towards 83-84 levels.

The rupee was last trading at 82.2675, down from 81.88 in the previous session, but off the session low of 82.33, Reuters reported. The rupee dropped to 82.33 within the first ten minutes of the open and has been range bound since, likely due to the RBI intervention, traders told the news agency.

"Basically, the RBI is making its presence felt and letting traders know once again that it will not allow one-sided moves," one of the state-run bankers who confirmed the intervention told Reuters.

The rupee’s future looks bleak, many said.

“The rupee has been the median performer among the Asian currencies so far this year but since the September 21 FOMC (Fed) meeting, it has become the worst performer following the high-interest rate differential, slower economic growth prospects, high dollar demand from importers and gain in crude oil prices,” said Dilip Parmar, Research Analyst, HDFC Securities. “Going ahead, the bias for the rupee remains weak.”

Other factors such as the Ukraine war and high FII outflows have also hurt the rupee.

”One of the reasons for the fall also is that institutional investors are selling Indian stocks and putting the money in US markets for safety and returns”, said Ketan Sonalkar, Head of Research, Univest.

(With agency inputs)