The Indian rupee plunged to record lows on Monday on the back of a strengthening US dollar and a continuing outflow of foreign funds from the local market.
The rupee slumped 60 paise on Monday to close at a record low of 77.50 (provisional) against the US dollar. During the trading session, the rupee touched its lifetime low of 77.52. The previous record closing low for the Indian currency was 76.98 on March 7.
In the last two trading sessions, the rupee has lost 115 paise against the greenback. On Friday, the rupee had slumped 55 paise to close at 76.90.
The US dollar has surged globally following the US Federal Reserve’s 50-basis-point rate hike last week and its guidance for more rate hikes in the coming months.
The US dollar index, which measures the currency against six major currencies, broke past the 104 level and was near 20-year highs at 104.07. The index had closed at 103.79 in the previous session. This year the index has so far risen 8%.
The Indian rupee is also suffering on account of weakness in domestic equities. Foreign institutional investors have so far in 2022 withdrawn 1.3 trillion rupees from domestic equities.
Last Friday, they remained net sellers in the capital market and offloaded shares worth 55.17 billion rupees, according to stock exchange data.
For these investors, a higher US interest rate makes investing in riskier emerging markets such as India an unattractive proposition. On the other hand, a weakening rupee lowers returns from investments in Indian capital markets.
Market analysts feel that last week’s surprise increase in the Reserve Bank of India’s interest rate by 40 basis points has so far done little to stem the currency’s fall. The move was intended to curb inflation and strengthen the Indian currency.
A weaker rupee means higher costs of imports, ranging from food to fuel and more expensive foreign travel. For manufacturers, it means increased prices of component parts among other things. This in turn affects inflation, which is now running at record levels.
In March, retail inflation rose to 6.95% – the third consecutive month the consumer price index breached the 6% mark. This is much higher than the Reserve Bank of India’s tolerance limit of 4%, with a margin of 2% on either side.
Market experts feel the April numbers will remain on the higher side as the full impact of the phased fuel price hike in March will be felt.
The gainers will be exporters as they can sell goods and services at much more competitive prices on the global market. But only those exporters who don’t have to depend on imports for components or raw materials will stand to gain.
For others, the high input costs of raw materials and commodities will neutralize the low currency value advantage.
Carpets, handicrafts and engineering goods are some of the industries which stand to gain. Service sectors like information technology will be able to quote lower prices to their foreign clients.