Rupee Closes Below 78/$ On Stronger Dollar, Higher Oil

The Indian rupee closed at a record low, falling below 78 against the U.S. dollar. Elevated oil prices and a stronger dollar pulled down the local currency.

The rupee opened at 78.14 against the dollar, 0.38% weaker compared to its Friday close. It weakened further in morning trade, down 0.57% to 78.28/$. However, perceived intervention from the central bank, helped the rupee trim its losses. The local currency closed at 78.04 against the dollar.

"Till the U.S. Federal Reserve meeting on Wednesday, there can be significant upward pressure on dollar-rupee," said Anindya Banerjee, vice president for currency derivatives and interest rate derivatives at Kotak Securities Ltd. Odds for a 75 basis point hike are rising and that is positive for the dollar. "However, we expect RBI to cap the upside. We are looking at a range of 77.90 to 78.40 on spot over the near term," Banerjee said.

"Weak domestic markets, rising crude oil prices, strong dollar and persistent foreign capital outflows is expected to keep the domestic currency under pressure in the week ahead," said IFA Global in a note on Sunday.

The rupee's weakness has been mostly in line with other Asian emerging market currencies. Last week, the rupee weakened 0.3%. "The U.S. Dollar Index climbed to a near four-week high against a basket of currencies on Friday, after data showed U.S. consumer prices accelerated in May, strengthening expectations the Federal Reserve may have to continue with interest rate hikes through September to combat inflation," wrote the currency research desk at Reliance Securities in its morning note.

Reliance Securities expects the rupee to trade in a range of 77.80-78.30 against the U.S. dollar on Monday.

Locally, markets are awaiting CPI inflation data due later on Monday. While headline inflation is likely to fall due to a supportive base, sequentially, prices are expected to continue rising. This could continue to push up bond yields. The 10-year benchmark bond yield traded at close to 7.6% on Monday.

Foreign investors have remained net sellers of Indian bonds and equities. Foreign portfolio investors have sold a net of Rs 1.8 lakh crore in the equity markets and another Rs 14,000 crore in the bond markets. Against the backdrop of a wider current account deficit, capital outflows could pressure India's balance of payments and support further rupee depreciation.

"Left on its own, the rupee would have already crossed 79/$ but the RBI has done a good job in intervening. I think, a year down the line, we could probably see 80 against the dollar but that's not saying much since forward rates are already predicting 80-80.50 levels," said B Prasanna, head of global markets at ICICI Bank, in an interview with BQ Prime last week.

Prasanna expects a depreciating bias for the rupee towards 79-80/$.