The partially convertible rupee weakened below the 78/$1 mark for the first time and last traded at 78.2130/$1. The Indian currency had settled at 77.8325/1 dollar on Friday.
Data released after business hours from India on Friday showed US consumer price inflation jumped to a new forty-year high of 8.6 percent in May, against expectations of a rise. of about 8.3 percent.
The sharper-than-expected inflation figure sent global stock markets crashing and pushed up US Treasury yields. The 10-year US Treasury yield was 3.19 percent, a whopping 14 basis points more than the previous close.
Domestic stocks also tumbled on Monday, further worsening sentiment for the rupee. As of 09:20am IST, the Nifty and Sensex were each trading 2.4% lower.
The US data has left investors concerned that the Fed may have to take an even more aggressive approach to reining in inflation than it already has.
The US central bank, which has already raised interest rates by a cumulative 75 basis points since March 2022, is expected to raise rates by 50 bps each at its June and July meetings.
Traders now fear that the central bank of the world’s largest economy could execute a further number of rate hikes, a process that would likely lead to global capital flowing out of emerging markets such as India.
Foreign investors have already been big sellers of Indian assets in recent months, having offloaded Rs 1.8 lakh crore worth of shares so far in 2022 and selling off Rs 14,055 worth of domestic debt.
“The rupee will trade in a range of 77.80 to 78.20 as US inflation rises to 8.3 percent, making the expectation of a 75 basis point rise in September come true” said Finrex Treasure Advisors chief treasury officer Anil Kumar Bhansali.
“Exporters can sell close to 78.20, since a gap of 40 paise offers that opportunity. Importers must wait below 78.00 to buy their imports in the short term.”
Traders are now looking to gauge the levels at which the Reserve Bank of India would intervene in the forex market to curb excessive volatility in the exchange rate.
The central bank, which currently has foreign exchange reserves worth around $600 billion, has aggressively intervened in the foreign exchange market in recent months through selling dollars.
Consequently, the rupee has fared better than other emerging market currencies in the face of geopolitical shocks.
“In general, it has been seen historically that whenever the rupee breaks its all-time high, it generally moves between Rs 1 and Rs 1.5,” CR Forex Advisors CEO Amit Pabari said.
“However, this time, as the key level of 77.80 breaks in USDINR, RBI might not allow the pair to rise sharply and we expect the rupee to trade between 77.80 and 78.50 in the short and medium term”.
(Disclaimer: The recommendations, suggestions, points of view and opinions given by the experts are their own. These do not represent the views of the Economic Times)