Rupee sinks to new low, shares slide on raging US inflation

The rupee slid beyond 78 per US dollar for the first time ever

The rupee plummeted to an all-time low and Indian shares fell more than 2.5 per cent on Monday as worse-than-expected US inflation for May raised the spectre of more aggressive interest rate hikes by the Federal Reserve.

Data on Friday showed that US May consumer prices hovered at a 40-year high and exceeded even the highest economist estimate in a Bloomberg survey, making investors dump risky assets such as equities and flock to the dollar, which is seen as a haven asset.

“There have been heightened concerns amongst investors that central banks will be more aggressive in the coming months to hike interest rate hikes in order to combat inflation, which will in turn hurt economic growth and put margins under pressure,” said Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities.

Many analysts expect the Fed to hike interest rates by at least 50 basis points when it meets later this week.

The additional hikes by the Fed to fight stubborn inflation could also make more foreign investors pull their money out of India and deal a bigger blow to the rupee. Asia’s No. 3 economy has already seen an unprecedented foreign selloff this year after the Ukraine war-related surge in crude oil prices led to worries about inflation in the world’s third-largest oil importer. A falling rupee could also raise India’s fiscal deficit.

The NSE Nifty 50 index closed down 2.6 per cent at 15,774.4, its lowest level since July 2021, while the BSE index fell 2.7 per cent to close at 52,846.7. The strong dollar hurt the rupee and pushed the Asian currency to a record low of 78.28 on Monday.

Some expect things to get better eventually.

“We expect the inflation in the US to taper going forward. The US government will eventually take measures to increase crude oil production. Majority of the spike in inflation has been triggered by energy prices like natural gas and oil. The US is in talks with Saudi Arabia for a higher production to offset the shortfall from Russia,” according to the currency desk of Emkay Global Financial Services. “There is no fresh trigger to predict if the rupee will be 79 or 80 unless and until there is a conflict between US and China with regards to Taiwan.”