The rupee hit yet another record low of 74.39 after falling 32 paise against the US dollar on Tuesday, following rise in crude oil prices, deepening concerns over Indias current account deficit and fund outflows.
The domestic currency on Monday had settled below the 74 level for the first time ever.
The rupee has taken a severe beating after the Reserve Bank of India reiterated on Friday that inflation management remains its sole policy objective and policy action will not be premised on anchoring the currency.
The RBI subtly suggested that the forex market is fluid and should let rupee find its fair equilibrium and let the trade-weighted exchange rate acts as a natural stabilizer. However, any imported inflation pressures arising out of currency depreciation would impact RBIs reaction function.
Madhavi Arora, Economist, FX & Rates, Edelweiss Securities said, “RBIs stance on currency comes at a time with other peer Asian emerging markets (primarily Indonesia and Philippines) are actively pursuing interest rate defense for attractive interest rate arbitrage to help keep their currencies afloat. However, not all are on the same boat. China has chosen to keep liquidity abundant back home, as it cut RRR by 100 bps over the weekend to support fragile growth amid slowing exports.”
“This is again pushing Yuan beyond the critical 6.90 level, with possible spillover to other Asian EMFX including INR. This puts China and India on similar trajectory where domestic macro dynamics (even though not exactly similar) seem to have taken precedence over higher rates to align with Fed normalisation,” Arora added.
Besides, sustained selling by foreign institutional investors are further building a pressure on Indian rupee. Additionally, fears of fiscal slippage would further weigh on Indian asset classes.
“We expect INR weakness to persist, heading towards 75 plus levels against USD, amid difficult global and domestic environment, unless some additional assertive policy steps come through. Even as we see a less probability of any unconventional policy measures amid comfortable FX warchest, we do not fully rule it out if INR remains volatile and an EM outlier in fragile FX space,” said Arora.