Indian Rupee at life time low

Overview

Amid concerns of rising interest rates and surge in dollar index coupled with widening current account deficit, the rupee fell to its lowest ever level of nearly 82.00 against the US greenback. The rupee has depreciated by more than 10% against the dollar so far this year to hit record low despite frequent interventions by the central bank. India’s ballooning trade gap and capital outflows are raising new risks for the rupee, just as the currency’s plunge to a record low adds to inflation woes. Indian rupee is expected to remain under pressure due to the faster pace of interest rate hikes by the US Federal Reserve. Volatile oil prices are also expected to take a toll on the currency.

The Reserve Bank of India (RBI) may increase the repo rate up to 50 basis points in its policy statement on September 30. RBI has already increased the repo rate three times since May. During this period the key policy rate has risen from 4 per cent to 5.40 per cent. If RBI increases rates by 50 bps in this monetary policy then the repo rate may reach 5.90 per cent.

In near to medium term USDINR is expected to depreciate further amid rising inflationary pressure and surge in interest rates, stronger dollar index and rising current account deficit. It is expected to move towards 83-83.5 in medium term while taking support near 80-80.5 levels.

Factors affecting USDINR

Fed hike interest rates

Recently US Federal Reserve (Fed) raised its benchmark interest rate by 75 basis points in its Sep meeting to tame the 40-year high inflation. US Federal Reserve increased the federal funds rate, its key short term interest rate, by 75 basis points to 3-3.25%.US central bank remains stubbornly aggressive and hawkish, indicating more rate hikes are likely before the end of this year. The Fed is now raising rates at one of the fastest paces in its modern history. By 2023, the Fed could raise rates to as high as 4.5 percent, according to the US central bank’s announced plan. The Fed predicts the US economy will crawl along at 0.2 percent this year. And in 2023 it seems that the US economy can hardly escape recession.

Global Rise in Inflation

Rising inflation globally is prompting various central banks to raise interest rates which will result in slowing economic growth. US Fed is determined to quash elevated inflation that is seeping through the country’s economy, with the most recent data showing inflation remaining stubbornly elevated at 8.3 percent in August, 2022 with large price rises in shelter, food, health care and education. Rising inflation across the globe is a cause of concern including in India as price hike over time reduces the purchasing power of consumer. India retail inflation moved higher to 7 per cent in August 2022 due to higher food prices. The figure stood at 6.71 per cent in July 2022.

Dollar index…Near 20 year highs

Dollar index jumped to its highest since May 2002 at 114.5 recently, majorly due to the weakness in the euro, which hovered close to a 20-year low near parity to the dollar amid concerns that an energy crisis could tip Europe into recession, while the U.S. Federal Reserve continues to aggressively tighten policy to curb inflation. So the broad rally in greenback have resulted in weakness in major currencies is across the world like euro, British pound and including Indian rupee.

Rise in US treasury yields

The U.S. 10-year Treasury yield was approaching 4%, breaching levels not seen since 2010, sparked by elevated expectations for Federal Reserve interest-rate increases and stickier inflation. The yield — used as a benchmark for borrowing costs in the real economy has scaled from 1.5% in January 2022.

Rising CAD (Current account deficit)

 India’s current account deficit (CAD), a key indicator of balance of payment of a country, is likely to remain within 3 per cent of the GDP in 2022-23 as against 1.2 per cent during the last fiscal, according to an article published in the Reserve Bank’s bulletin. The widening trade deficit, or the gap between the value of imports and exports, puts pressure on the balance of payments. India’s trade deficit during the first five months of 2022-23 widened to USD 124.5 billion from USD 54 billion in the previous corresponding period.

Monthly Chart of DOLLAR INDEX

Analysis

Dollar index have witnessed sharp upside movement on Monthly charts as it moving above 10, 20 and 50 day moving averages. RSI on daily charts is above 80 indicating that it is in overbought zone. On monthly charts it has key resistance near 120 levels .Overall it can move in range of 110-120 in next couple of months.

Weekly  Chart of USDINR FUTURES SPOT

Analysis

Weekly chart of USDINR spot is showing steady upside movement as it is moving above the 10, 20 and 50 day moving average. RSI indicator have moved above 80 thus indicating that prices are overbought. USDINR has recently broken the key resistance of 80.3 and now heading towards upside channel resistance of 83 levels.

Disclosure

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