Rupee at historic low, but RBI intervention slows slide

The rupee hit a new low against the dollar on Tuesday as rising oil prices sparked concerns over longer-term inflation. However, sporadic dollar selling by central banks helped contain losses.

After hitting record lows in the previous four sessions, the rupee slumped to a fresh intraday low of 78.78 against the dollar as Wall Street slipped overnight and oil prices recovered after last week’s rout.

Reuters quoted some convertible rupees at 78.75/76 per dollar, compared with Monday’s close of 78.34. The local currency 41 paise to an intraday all-time low of 78.78 per dollar, the PTI report said.

“We think India’s external position remains relatively healthy, but with portfolio outflows expected to continue due to weak global equities and a further deterioration in the balance of payments in the coming months, the risk of an underperformance of the Indian rupee cannot be underestimated,” Emkay Global Financial Services said in a research note.

More than two-thirds of India’s oil needs come from imports. Rising crude oil prices have exacerbated the country’s trade and current account deficit (CAD) while hurting the rupee by increasing imported inflation.

Historically, rupee depreciation has in tandem with the BoP deficit, the report said, adding that “we see a BoP deficit of $61 billion in FY23 and CAD/GDP of 3.2% ($112 billion).”

“With crude prices rising again, we may see the rupee rise to 79-79.50 levels next week or so, depending on the central bank’s actions,” a senior trader at a private bank Reuters.

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That was the case, although the U.S. dollar index, which measures the greenback’s performance against a basket of six different currencies, was trading slightly lower on the day.

“The rupee extended losses on Tuesday morning despite a weaker dollar index. Crude oil prices rebounded and rumours of more economic sanctions on Russia pushed the rupee lower. FII sell-off in the domestic market continues, which is also positive for the rupee,” Mehta Equities said Rahul Kalantri, vice president of commodities.

In addition, economic sanctions on Russia could lead to volatility in global energy prices and pressure on emerging market currencies. We expect the rupee to continue to weaken in a choppy manner this week and may break above the 78.90 level,” he added.

Oil prices rose for a third day as supply concerns intensified due to political unrest in Libya and Ecuador. Exporting powerhouses Saudi Arabia and the United Arab Emirates seem unlikely to increase production significantly.

Traders claim that while the RBI occasionally sells dollars through state-owned banks to stem the rapid depreciation of the rupee, the system has much higher demand for dollars.

Analysts see the widening LIBOR-OIS gap as a sign of global dollar funding stress, exacerbated by the RBI’s massive intervention in the forward market.

The one-year onshore dollar forward premium has fallen below 3% as the RBI sells forward dollars rather than injecting rupee liquidity into the system.

Madhavi Arora, Economist at Emkay Global, said: “Dislocations in forward rates, falling FX coverage, high commodity prices, limited exchange rate pass-through to inflation and rising INR valuations may require the RBI to recalibrate its FX interventions. strategy,” , Reuters.

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She added: “Letting the INR slowly diminish over time is the right strategy, giving CAD room for improvement.”

Jigar Trivedi, a research analyst at Anand Rathi Shares and Stock Brokers, Reuters he the rupee to weaken to 80-81 per dollar by year-end, weighed down by twin deficits and rising interest rate spreads.

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