Highlights

  • Fed rate hikes pushing investments towards dollar-backed instruments
  • FIIs continue to be sellers in the Indian market

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Rupee at 80, hits record low Vs Dollar

The dollar continues to gain vs emerging market currencies

Rupee at 80 may be the headline but the star of the story is Dollar as the script and casting for the rout is not homegrown. Simply speaking, it is Dollar which is king and rupee an unfortunate victim of the turn of events - geo political and economic.

Tracking the tumble

From an average rate of 73.93/$ in 2021 rupee has tumbled over 27 times to hit new record low in this year itself, tumbling over 6.5%. To paint a true picture it is not the rupee falling but the dollar rising. The dollar has risen to a 20 year high vs a basket of currency adding pressure across the globe. Euro has hit parity vs the dollar, something unseen in 20 years. The Japanese Yen continues to struggle at 24 year low as well.

Why is the Rupee hit so hard?

India's large amount of dues in dollars because of large import bill leaves the fifth biggest economy in the world more exposed to pressure as the dollar gains and it has to shell out far more currency to make pay debt. As the world’s third largest oil importer, India is vulnerable to rising oil prices and in turn the rising demand for dollars to make those payments.

Dollar payments pile up

Its not just the household budgets that have been hit with high prices, it is playing havoc with North Blocks balance sheet as well. India’s trade deficit, the gap between imports and exports - widened the most on record in June to $25.63 billion adding more pressure to the rupee as demand for dollars to make those payments rises.

Don't we have reserves, what is the RBI doing?

RBI's forex reserves have fallen by $42 billion dollars since Februrary and is now at the lowest in more than 14 months at $588.3 billion as of July 1. The central bank has intervened directly into the forex markets as well via tools such as restricting gold imports, allowing settlement in rupee for external trade. But this is a global rout so intervention and course correction may be a tough ask for Governor Shaktikanta Das.

Who to blame - Putin or Powell?

Oil has what has boiled India's import bill with Russia's invasion of Ukraine creating global fuel shortages. In fact for every $1 increase in the price of oil, India’s import bill increases by $2.1 billion. Putin to petrol to payments that has really been the domino effect. Another side effect and a bigger one has been from Jerome Powell, historic hikes from the US Central bank has made dollar denominated investments more attractive, and as globally economies slow risk aversion rises and FIIs start to park money to safer slower investments mostly dollar based.

What is the endgame?

With global central banks playing catch up on rates with Powel being the pied piper, traders expect dollar to gain more from here so emerging market currencies such as the rupee are likely to see more pain.

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