The rupee fell 10 paise to 75.88 against the US dollar on December 14, weighed down by domestic equities and persistent foreign fund outflows.
At the interbank foreign exchange market, the Indian currency opened at 75.94 against the greenback. The rupee, which slipped to the day’s low of 75.95 and a high of 75.83 against the dollar, is inching close to the 76-mark.
A number of factors are pulling the rupee down, say experts. The uncertainty triggered by the Omicron strain of the coronavirus that was flagged by South Africa in November is the biggest factor along with a strong dollar index and concerns about a widening deficit in the domestic economy.
India has, so far, reported 40 cases of Omicron, a strain that is believed to be more infectious, likely to escape vaccine but unlikely to cause severe illness.
“The fall in the rupee can be attributed to a combination of factors. First, the USD is strengthening mainly due to the expected action of the Fed, which, in turn is pushing down other currencies.
“Second, FPIs have been whimsical, which are also in the draw out mood as a result of the Fed action. Also, year-end phenomenon may be contributing to this action,” said Madan Sabnavis, Chief Economist at Care rating agency.
The Federal Reserve is to announce its policy decision on December 15, with the US central bank also expected to discuss tapering of bond-buying plan as inflation inches up.
“Thirdly, the current account is turning into a deficit though not of any prodigious level. Therefore the tendency has been to witness a depreciation. However, the move towards Rs 76/$ , to my mind, will be only be temporary and there would be reverting to 74.5-75.5 range as we can also be expecting RBI intervention at some point of time given that weak rupee makes imports more expensive,” said Sabnavis.
According to Jateen Trivedi, Senior Research Analyst at LKP Securities, the rupee is likely to trade in 75.75-76.25 range.
The rupee traded weak, inching closer to the 76-mark, touching a 52-week high after prices surged in December rapidly from 75 to 75.88 because of uncertainty surrounding Omicron, a rise in the dollar index and profit booking in risky assets like secondary capital markets, he said.
Outflow of capital from the emerging markets in the wake of Omicron spread is contributing to the currency’s fall. This is despite the RBI has seen strong build up of foreign exchange reserves. The central bank has added over $ 60 billion in forex reserves in FY22.
The Indian rupee has fallen to its lowest level since June 2020, which makes it an 18-month low against the US dollar, Nish Bhatt, Founder & CEO, Millwood Kane International.
“The fall is largely driven by the fear of the rapid spread of the Omnicron variant. This post the UK PM’s warning of a ‘tidal wave’ of new cases, and WHO stating it as a high global risk,” Bhatt said.
There is a broad weakness across Asian markets ahead of the US Fed’s meeting that may announce an accelerated pace of liquidity tightening.
“A tapering by US Fed will lead to an outflow of fund flows from emerging markets. The inflation in the US has risen to a multi-decade high, posing a risk for the Fed to act sooner than expected,” Bhatt said.
Typically, when the rupee falls, it hurts importers as they need to pay more against the dollar while exporters benefit.
“Rupee continued to remain under pressure following weakness in domestic equities and strength in the dollar against its major crosses,” said Gaurang Somaiyaa, Forex & Bullion Analyst, Motilal Oswal Financial Services.
Weakness in the currency extended as market participants expect that the Federal Reserve to increase the pace of tapering, he said.
“At the same time, ECB and the BoE will be releasing their policy statements and that could trigger volatility for the major crosses. Today, from the US, PPI number will be released and that could trigger volatility for the dollar. We expect the USDINR (Spot) to trade with a positive bias and quote in the range of 75.70 and 76.20,” said Somaiyya.
