Rupee plunges to record low as dollar climbs, trade deficit widens 

MUMBAI:  The rupee, which has borne the brunt of huge FII outflows amid a  rise in commodity prices since the start of the year, plunged to an all-time low of 79.37/38 to the dollar on Tuesday, triggered by the dollar index rising to a two-decade high and fears of a rise in the trade deficit. 

The DXY, which measures the greenback against six of the world’s leading currencies, rose above 106 on fears of a recession in Europe amid high gas prices. Though prices of crude,  India’s largest import item,   are off the Ukraine war-induced high of $140 a barrel, fears of a rise in trade deficit persist, making the rupee vulnerable to the increased volatility.

Amid these challenges, certain brokerages expect further weakness in the local unit in the coming months. For instance, brokerage firm Nomura expects the rupee to test 82 to the dollar by Q3,2022, and 81 by Q4, 2022, on “weakening India BoP dynamics, aggressive Fed hikes and rising US recession risks” among multiple headwinds.  The country’s current account deficit could rise to 3.3% of GDP in the current fiscal year (FY23) from 1.2% in FY22, the brokerage estimates. 

KN Dey, managing partner, United Financial Consultants, expects the rupee to trade in a 78.5-80 range this month.  FIIs sold Indian shares worth $6.43 bn in June as the US central banks raised a benchmark interest rate, reducing the risk-free rate of return from investing in risky assets in EMs like India. Separately, India’s trade deficit ballooned to a record $25.63 bn in June from less than $10 bn a year ago.

Religare Broking’s Sugandha Sachdeva expects the rupee to head towards 80-81 zone against the dollar, “though the RBI is expected to proactively intervene in the markets to curb the pace of decline in the domestic currency.” Meanwhile, Brent futures contract on Tuesday hit the 10% lower circuit at $102.12 as the DXY hit a two-decade high.