The Indian rupee plunged below 83 against the dollar on October 19 for the first time and closed at a new low, tracking losses in emerging currencies market.
The rupee opened at 82.33 to a dollar but slipped to an all time low of 83.01 intraday. It ended the day at 82.99, down 0.76 percent from its previous close of 82.36.
As the dollar gains strength, other currencies continue to be hammered. The British pound fell 0.6 percent to 1.1247, while the Japanese yen dropped as low as 149.48, its weakest since 1990 and edging closer to the psychological 150 level. The dollar index gained 0.3 percent.
Inflation, rate worries
On the domestic front, inflation is also likely to rise after the minimum support prices for the winter crop were raised at a faster pace than last year, including that of wheat which was up 5.5 percent.
“Besides domestic inflation worries, global uncertainties and spillover risks remain high, with the US Fed determined to tighten policy progressively till inflation makes a decisive turn, leaving the door open for more pain for emerging markets’ assets,” said Radhika Rao economist at DBS Bank.
DBS Bank expects 60bps more hikes this fiscal year, driven by the need for price stability, to anchor inflationary expectations and backstop rate differentials to support the currency. Into FY24, the policy committee is expected to draw a pause, she said.
Recently, two external members of the Reserve Bank of India’s monetary policy committee called for slower rate hikes and a pause at 6 percent.
Prof Jayant Varma advocated a pause at 6 percent amid concerns about fragile growth. “It is dangerous to push the policy well above the neutral rate in an environment where the growth outlook is very fragile,” Varma said.
Ashima Goyal said high Indian repo rates imposed heavy costs in 2011, 2014 and 2018, adding it is necessary to go very carefully now that forward-looking real interest rates are positive.
Among 10-year yields, German bonds gained 7 basis points, US treasury yields 5 basis points and Indian bond yield jumped 3 basis points.
The weakness came after a bigger-than-expected rise in UK inflation raised concerns that persistent price increases will prolong a recession in the country.
Earlier, UK CPI rose 10.1 percent in September from 9.9 percent a month ago, matching a 40-year high reached in July.
Analysts said markets have already priced in a full 100 basis point hike each by the Bank of England in November and December meetings and a 75 bps for the February meeting. The European Central Bank is expected to go for a 75 bps hike in the upcoming meeting.
One basis point is one-hundredth of a percentage point.
“This will surely speed up the hiking pace for these central banks against the Fed but keep them far to come at par with the Fed, keeping the DXY the benefiter that it is,” said CR Forex in a note to traders.
