Guwahati: The rupee saw yet another lifetime low on Friday morning after the US dollar index rose to a two-decade high this week on optimism that demand for safe-haven currencies like the dollar would increase.
In contrast to Thursday’s closing price of 80.86, the rupee opened this morning 25 paise weaker than the previous session, reaching a record low of 81.09 against the US dollar. The rupee’s devaluation yesterday was its greatest one-day decline since February 24.
According to forecasts, the US Federal Reserve increased the repo rate by 75 basis points, the third straight increase of the same amount. This effectively indicates that investors would gravitate to US markets for higher and more reliable returns as a result of the tightening monetary policy.
The Fed also made hints that there would be additional rate increases and that they would continue to be high until 2024.
The US central bank expects that the continuous increases in the target range will be reasonable as it works toward long-term goals of maximum employment and inflation at a rate of 2%. An weapon of monetary policy that normally works to reduce demand in the economy and lower inflation is raising interest rates.
Although it slightly decreased from 8.5 to 8.3 percent in July, consumer inflation in the US is still above the target level of 2 percent.
Santosh Meena, Research Head at Swastika Investmart, stated that despite the improvement in domestic economic prospects, the US Federal Reserve’s recent actions and commentary made it clear that the rate-hike cycle was still far from over. He also predicted that the rupee would continue to be under pressure.
India’s foreign exchange reserves are currently at a two-year low. Since the Russia-Ukraine conflict turned violent earlier this year, the reserves have decreased by over USD 80 billion.
Due to the Reserve Bank of India’s (RBI) expected market intervention to preserve the weakening rupee, India’s foreign exchange reserves have been steadily declining over the past few months.
The RBI typically intervenes in the market through liquidity management, including by selling dollars in order to stop a sharp depreciation of the rupee.
A depreciation in the rupee typically makes imported items costlier.
“The Dollar Index may continue with its positive bias as the US Fed decided to raise interest rate by 75 bps, for a third consecutive month and signalled that it would continue to lift rates this year at a most rapid pace to combat inflation, which is running hot,” said ICICI Securities.
The rupee saw yet another lifetime low on Friday morning after the US dollar index rose to a two-decade high this week on optimism that demand for safe-haven currencies like the dollar would increase.