The rupee closed at a fresh low to the dollar on Wednesday as a fall in domestic equities amid ceaseless overseas investment outflows soured sentiment for the domestic currency, dealers said.
The rupee settled at a fresh low of 78.97 to the greenback on Wednesday, 0.3 per cent weaker than previous close. In the course of trade, the rupee hit a lifetime intraday low of 78.98 to the dollar. On Tuesday, the local currency had closed at a record low of 78.77.
Dealers said while the Reserve Bank of India had intervened on Wednesday to limit volatility in the currency market, its had slowed down the pace of such intervention in the face of fundamental headwinds for the rupee. The RBI was said to have sold dollars at 78.97-78.98 per dollar on Wednesday.
Ever since the war in Ukraine broke out in late February, RBI has been heavily expending its foreign exchange reserves in order to shield the rupee from runaway depreciation. Since February 25, the headline foreign exchange reserves have declined by $40.94 billion.
The rupee started the day on a weak note as domestic equity markets notched up losses following pessimism over the impact of high inflation and rate hikes in the US, which dragged down key indices on Wall Street and then spilled over to Asian equities.
The BSE Sensex and the NSE Nifty each settled 0.3 per cent lower than previous close. Foreign institutional investors have net sold a massive $6.3 billion worth of Indian stocks so far in June, National Securities Depository Limited data showed.
This marks the largest monthly FII outflow from stocks since March 2020, the month in which the first lockdowns were imposed to curb the spread of Covid-19.
So far in 2022, foreign investors have pulled out $28.4 billion from equities, far outstripping the $11.8 billion outflow seen during the Global Financial Crisis of 2008. The rupee has depreciated 5.9 per cent versus the dollar over the same period.
“The sentiment remains feeble for the rupee amid foreign fund outflows and fear of dollar shortages following QT (Quantitative Tightening) from the Federal Reserves,” Dilip Parmar, Research Analyst, HDFC Securities said to Business Standard.
The analyst said that the rupee could weaken to 79.10 per US dollar in coming days. If the rupee were to strengthen over the near term, it would likely not rise beyond 78.38 per dollar, he said.
While oil prices cooled off on Wednesday, the price of the most active Brent crude contract has risen over 2 per cent over the last couple of days after UAE ruled out additional supplies.
Given that India imports more than 80 per cent of its oil needs, this does not bode well for the current account deficit and therefore the rupee, analysts said.
Moreover, the US Fed, which has hiked rates by 150 basis points so far in 2022, is widely expected to raise rates by 50-75 bps more at its policy in June.
Higher US interest rates dim the appeal of assets in riskier emerging markets.
“The RBI today intervened around 78.97-78.98 to the dollar, but the magnitude of the intervention over the last couple of days has gone down,” a dealer with a state-owned bank said.
“RBI wants to prevent the excessive volatility and the speculation but it does not want to risk rupee being too overvalued against EM peers when the global factors such as crude and US rates warrant a depreciation,” he said.