Mumbai: Raising concerns over high imported inflation, the rupee fell below the psychological level of 80 to 80.05 against the US dollar intra-day amid tightening monetary conditions and risk-off sentiments as well as persistent outflows from domestic markets.
Significant dollar demand from oil importers amid elevated crude oil prices and concerns about swelling trade deficit have also been key catalysts behind the steep descent seen in the Indian currency, which has fallen by over seven per cent since January this year.
Although the rupee has depreciated against the US dollar, it has appreciated against other major currencies such as euro and the Japanese yen. “Global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian rupee against the US dollar,” Union Finance Minister Nirmala Sitharaman said in a written reply to Parliament.
Currencies such as the British pound, the Japanese yen and the euro have weakened more than the Indian rupee against the US dollar and, therefore, the Indian rupee has strengthened against these currencies in 2022, she said.
In a Twitter post, Sanjeev Sanyal, Member, Economic Advisory Council to the Prime Minister, had said, “The RBI is using reserves to smoothen moves but correctly allowing market adjustment… the only real cause for concern is imported inflation from energy prices. Given oil import dependence, there is little India can do about this in the short term beyond some domestic adjustments (say cutting taxes at the margin) but all such measures have a price.”
Even as commodity prices have eased from their peak, they are expected to pose a substantial risk for inflation as almost three-fourths of India’s inflationary pressure is seen emerging from imported inflation. Capital outflows and the RBI’s defensive action to protect rupee from a sharp slide against the dollar have resulted in lower forex reserves, posing concerns for the country’s current account deficit in this fiscal.
According to analysts, long-term inflation expectations have fallen in the US, and concerns of super-sized tightening by the US Fed at the forthcoming meeting have eased, which is leading to a retreat in the dollar index from multi-year highs and aiding the local unit. Besides, the US central bank might be forced to pause its rate hike cycle going forward given the concerns about recessionary risks and it seems that the worst is likely to be over soon.
Foreign portfolio investors (FPIs) have pulled out Rs 2.37 lakh crore since January this year and forex reserves have dwindled by $62 billion from the September 2021 peak of $ 642.4 billion.