Rupee glides to a new low against US dollar, expected to fall further

The Indian rupee fell to a record low as the dollar strengthened after a 75 bps Federal Reserve rate hike. Worries over Russia also came in after Moscow escalated tensions with Ukraine. The rupee is at a record low of 80.48 per U.S. dollar from 79.97 in the previous session. After hitting a record low to the dollar, the Indian rupee is expected to fall more as the U.S. Federal Reserve hinted at more aggressive rate hikes to tame inflation. The median of Fed officials' outlook, which has U.S. rates at 4.4% by year's end and staying high in 2023, seemed to spook even hawkishly positioned rates and currency markets and quickly extinguished relief that rate hike had not been larger.

The domestic currency had hit the previous record low against the USD in August at 80.12. The continued strength of the US dollar, a flat trend in domestic equities and firm crude oil prices is weighing on the rupee. Asian currencies opened weaker, with the Chinese yuan slipping below 7.10 to the dollar. The dollar surged to an over 20-year high as the central bank signaled it was willing to risk slowing economic growth and pressure on the labor market to control inflation. The dollar index also towered to make a new 20-year high at 111.3 with major currencies falling against dollar. Euro against dollar is trading at 20-year low levels of 0.98 and GBP against dollar is also trading at 29-year low level at 1.12 levels.

The RBI has been selling dollars to alleviate the depreciation pressure on the rupee due to the surging dollar and foreign portfolio outflows. The central bank sold a net of $19 billion from its reserves in July alone to prevent the rupee from falling much below 80. The RBI's forward dollar holdings have fallen to $22 billion from $64 billion in April.

Clearly there is pressure on RBI and will be interesting to see how RBI will be able to defend rupee which is above 80 levels.