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The rupee saw a sharp decline on Wednesday, breaching the 83 per dollar mark for the first time, amid hefty dollar demand from fuel companies and because the Reserve Bank of India (RBI) intervened less aggressively, dealers said.
A strengthening in the dollar and higher US bond yields added to the rupee’s weakness.
The domestic currency closed at 83.02 per US dollar, which was a decline of 0.8 per cent compared with the previous close of 82.36 per dollar. Before this, the rupee’s record closing low was 82.36 per dollar, while the all-time intraday low was 82.72 per dollar. The Indian currency has shed 10.5 per cent versus the US currency so far in 2022.
“A couple of oil and gas public sector undertakings (PSUs) may have made dollar purchases of about $1 billion. As the USD/INR was trading in a very narrow range of 82 to 82.40 for a couple of trading sessions, liquidity remained quite thin in the market,” said Kunal Sodhani, vice-president of Shinhan Bank. According to dealers, on Wednesday, the RBI did not step in and sell dollars around the 82.40-82.44 mark, a level that it had protected in the six previous trading sessions. Since October 11, the rupee has moved within a range of 82.03 to 82.43 against the dollar.
With macroeconomic fundamentals remaining weak, the RBI’s sudden absence led to a quick depreciation in the currency. Traders were said to have suffered successive technical losses once the rupee breached the 82.50 per dollar mark. This aggravated the fall. On Wednesday, the rupee was among the worst performing emerging market currencies.
“Once the 82.40/$1 mark broke, the rupee directly went and broke 83/$1. People would have gone short (on the dollar) thinking that level (82.40-82.44) will get protected. Once that level broke, everybody came in and bought dollars. We saw a similar move when the RBI stepped back and the rupee broke past 80 and came to 82,” said Bhaskar Panda, HDFC Bank’s executive vice-president of overseas treasury.
Panda sees the rupee in a range of 82.50-83.50 to the dollar in the near term.
With headwinds like aggressive interest rate increases by the US Federal Reserve and a widening current account deficit, analysts said the RBI would likely intervene less aggressively through dollar sales. The central bank’s foreign exchange reserves have declined by about $100 billion since the beginning of the war in Ukraine.
“It’s the RBI’s action in the spot market that will keep driving the rupee. On some days you will have big moves and on others you will not. Today was one of those days where the RBI went away,” said Nitin Agarwal, head of trading at ANZ Bank.
“The fundamental forces are standard. Regular oil demand, regular import demand, and defence demand. We are running a CAD. To the extent that there is more dollar demand there are inflows,” he said. Foreign portfolio investors have net sold $23.16 billion of Indian equities so far in 2022.
Anubhuti Sahay, Standard Chartered Bank’s head of economic research for South Asia, said the rupee’s weakness since late September was indicative of the RBI’s intention to let the currency depreciate in line with the fundamentals. India’s current account deficit is expected to rise to around 3 per cent in the current financial year from 1.2 per cent in the previous one, while domestic inflation remains elevated.
“It’s pretty clear that till mid-September or the third week of September the RBI was defending the 80 mark very aggressively and since then it has allowed the rupee to depreciate in a calibrated manner. We think this strategy is well justified,” she said.
Standard Chartered Bank predicted that the rupee could hover around 83 to the dollar at the end of 2022, but, Sahay said, there are risks of the rupee weakening more by then.
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