Indian Rupee Falls Most Since Russia Began Invasion Of Ukraine

The Indian rupee fell to a record low as the dollar strengthened after a 75-basis-point rate hike by the U.S. Federal Reserve.

The local currency opened 0.4% lower over its previous close at 80.28, a record low for the currency. It fell 89 paise to a fresh low of 80.87 during the session. The currency closed around the same level.

This is the most the rupee has weakened against the U.S. dollar since Russia invaded Ukraine on Feb. 23. Through the day, the rupee depreciated as much as 1% to 80.77.

Prior to this, the low was 80.12, hit on Aug. 29. This is the fifth time the rupee has breached the 80-mark this year.

Powell delivered a super hawkish hike by indicating clearly that the central bank is willing to risk recession to get inflation back down from 8% to below their target level of 2%, Anindya Banerjee, vice president for currency derivatives and interest rate derivatives at Kotak Securities, said.

At a time when West is witnessing energy crises and food price shock, such a statement opens the door for the Fed to hike for longer and keep rates elevated till inflation pressures abate. This is going to be positive for U.S. Dollar Index, he said.

The U.S. Dollar Index is now an inter play on relative monetary policy hawkishness and also energy crises, Banerjee said. "We expect USDINR to grind higher with U.S. Dollar Index but at a slower pace," he said. Lower oil prices, FPI flows and RBI intervention can ensure that rupee remains an outperformer."

Madhavi Arora, lead economist at Emkay, said emerging market currencies will clearly remain under pressure.

India’s massive FX defense amounting to more than $100 billion estimated since Oct-21 (spot + forwards) makes it a near-outlier in the Asia FX fall. "So the war-chest is falling faster than the pace of the war fading," she said. "We have been suggesting the FX intervention strategy for the RBI will need to be revisited for reducing emerging bilateral imbalances. Dislocation in forward rates, falling FX cover, still-high commodity prices, limited exchange rate pass-through to inflation and elevated INR valuations may call for the RBI to re-orient its FX intervention strategy."

Ritesh Bhansali, vice president at Mecklai Financial Services, expects the rupee to breach 81 in the next few sessions.

There are two things to be watched out for—the Russia-Ukraine situation and the Chinese Yuan that has been weakening against the USD more than the rupee impacting export competitiveness, he said. The RBI is expected to intervene on intermittent basis. However, the intervention may not be very aggressive till the time RBI finds a new level to strongly defend rupee.