Rupee Hits All-Time Low Again, Here's Why It's Falling Against The US Dollar

The downfall of the Indian currency, the rupee, against the US dollar just doesn't seem to be stopping. It has fallen to an all-time low again, dropping to 83.29 vs. the US dollar.

Rupee Hits New All-Time Low Of 83.29

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The rupee depreciated for the fourth straight day to settle 13 paise lower at its lifetime low of 83.29 against the US dollar on Monday, mainly due to risk aversion in global markets and rising crude oil prices.

Besides, a strong US dollar against key rivals overseas and a negative trend in domestic equities weighed on investor sentiments, according to Forex traders, as per the PTI report.

At the interbank foreign exchange, the rupee opened at 83.09 against the dollar and traded in the range of 83.09 to 83.30 against the US dollar. The rupee closed at the record low of 83.29 against the dollar, registering a fall of 13 paise from its previous close and hitting the all-time low again.

Also Read: Explained: How RBIs Digital Rupee (e?) Is Different From UPI

What Experts Are Saying About Rupee's Downfall

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"This week will remain highly volatile following a series of central bank policy rate meetings across the developed and emerging market economies. The baseline of it is the dollar to hold onto its strength through the week," Dilip Parmar, Research Analyst at HDFC Securities, said.

In the near term, spot USD/INR is expected to cross the record high and may see a level of 83.50 to 83.70 while it could hold the support of 83, Parmar added.

Forex traders said the depreciation in the rupee can be attributed to several factors, including elevated crude oil prices, a strong US dollar, and foreign fund outflows and a widening trade deficit.

India's exports declined by 6.86% to $34.48 billion in August this year, as against $37.02 billion in the same month last year, government data showed on Friday.

Imports too declined by 5.23% to $58.64 billion, as against $61.88 billion recorded in August 2022. Meanwhile, India's forex reserves dropped by $4.992 billion to $593.904 billion for the week ended September 8, the Reserve Bank of India said on Friday.

"The depreciation in rupee comes on the back of the recent spike in US dollar and treasury yields amid worries that the US central bank, the Federal Reserve, will keep interest rates elevated for a longer duration. The fall in Chinese yuan led to a slide in domestic currency on concerns over export competitiveness," said Amit Sajeja, Vice President Research, Commodities & Currencies at Motilal Oswal, as per the Mint report, adding that he believes the near-term outlook for the rupee remains negative, but the pace of depreciation may be smaller as the RBI will keep supporting the local currency at lower levels.

Also Read: 6 Years On Since Demonetization, Here's What Happened To The Old 500 & 1000 Rupee Notes

Why Is Rupee Falling?

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Let us dive deeper into the key reasons behind the recent depreciation of the rupee:

-US Dollar, Yields Spike

The US dollar was set for a fifth winning week against its major peers, making it the longest winning streak for 15 months. It touched a two-month high of 103.59 overnight.

Though the US dollar index, which measures the currency against six developed-market rivals, including the yen and euro, eased 0.02% to 103.38 on Friday, it is set to gain 0.5% for the week. As per Mint report, the economic data released recently indicate that the economy continues to be resilient. This is likely to keep US yields elevated. On the domestic front, the Indian benchmark 7.26% 2033 bond yield was trading at 7.23% after hitting a more than four-month high of 7.26% on Thursday.

-Depreciation in Yuan

A fall in China's yuan also weighed on the local rupee. The yuan has depreciated 0.6% this week and 5.3% this year.

Concerns about a growing debt crisis in the country's sprawling property sector and sputtering economic recovery are pressuring the yuan.

"The weakness in the CNY, elevated crude oil prices, and dollar strength due to rising US Treasury yields put upward pressure on USDINR. Going ahead, next week¡¯s Jackson Hole Symposium will set the tone for the USDINR spot. With US inflation being sticky and the labour market being strong, we expect Fed Powell to reiterate his hawkishness next week, which can drive the USDINR spot higher," said an economist with a private bank, the report mentioned.

However, the economist believes active RBI¡¯s FX intervention may cap the rise in spot. "RBI is intervening quite heavily in the FX market, and we expect it to protect the record high level of ?83.29/$. In the USDINR spot, the short-term trading range is 82.60¨C83.50," the economist said.

-CPI Inflation

Retail inflation in India soared to a 15-month peak of 7.44% in July, breaching the upper end of the Reserve Bank of India¡¯s (RBI) 2%¨C6% comfort band, driven by a surge in vegetable and cereal prices. The CPI inflation in June was 4.87%.

High domestic inflation raised concerns that the central bank would keep the interest rate higher for some time, with economists pushing rate-cut expectations to FY25. This weighed on the local currency.

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-Uncertainty On Interest Rates

Market sentiments are hurt by fears that the US Federal Reserve will keep interest rates elevated for a longer duration, as recent US economic data indicates a resilient US economy.

"Going forward, worries over the slowdown in the Chinese economy and expectations that the Fed may hike interest rates once will keep yields elevated," Sajeja said. He believes immediate support for the spot rupee is seen at 82.90¨C82.50 levels.

"The key level to watch out for would be 83.30, and a break above this can lead the rupee to depreciate towards 83.75¨C84.20 levels in the next six-month period," he added.

-FIIs Selling

Foreign institutional investors (FIIs) have net sold Indian shares to the tune of ?10,658 crore so far this month in the cash market, as per the data on exchanges. The foreign fund outflow has also led to a fall in the rupee.

¡°The escalation of US bond yields is expected to limit the influx of foreign investments into the Indian market, further impacting market dynamics," said Vinod Nair, Head of Research at Geojit Financial Services, as mentioned in the report.

How Is Rupee Performing Against Different Currencies?

(source x-rates)

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