Indian rupee on Friday hit a fresh record low against the dollar as foreign institutional investors (FIIs) continued selling in local equity markets.
The currency opened at 77.75 and touched a fresh record low of 77.8075 a dollar. At 12.32pm, the domestic currency was trading at 77.80 a dollar, down 0.08% from its previous close.
FIIs have sold $ 23 billion in domestic equities so far this year amid higher crude prices that continue to stoke worries about inflation and fiscal deficit.
Analysts are awaiting the European Central Bank (ECB) policy meeting due later today and the US Fed meeting next week. ECB is likely to announce the end of asset purchases and indicate the beginning of the rate hike cycle. Rate hikes are likely to commence from as early as July policy given record high inflation in Germany and Eurozone, analysts said.
“Intraday ranges have been extremely narrow as RBI has been intervening to prevent runaway Rupee depreciation. RBI’s presence is deterring speculators from freely expressing a long USDINR view,” said IFA Global in a note.
The domestic currency was stable for the last two weeks due to weakness in the dollar amid concerns over global growth outlook. Further, RBI has continued to support the currency through foreign exchange sales. In fact, RBI’s forex reserves have fallen by $ 36.1 billion since the start of the year.
“Risks to the rupee outlook remain tilted to the downside. First, global commodity prices continue to remain elevated thus putting pressure on India’s external balance. Second, FII outflows have been persistent at $ 5.5 billion in May 22 and $ 23 billion in CYTD22. Third, domestic retail inflation has been tracking higher. Fourth, dimming growth prospects will also weigh on rupee,” said Bank of Baroda in a note.
On Wednesday, the RBI hiked the repo rate by 50 basis points to 4.90%, while leaving the cash reserve ratio (CRR) unchanged. For FY23, it raised its retail inflation projection from 5.7% year on year to 6.7%, while retaining GDP growth at 7.2%.
According to analysts, over the next 12 months, RBI can be expected to hike policy rates by another 100-150 basis points to 6-6.5%.
“We continue to see India 10 year yields rising to over 8% and despite the evidence of currency inflexibility rupee-dollar is seen weakening beyond 80,” JM Financial said in a note.