Quantitative Easing

Rupee hits record highs; Main reasons explained

The Indian Rupee has been in daily headlines for the past few weeks as it hits new lows. On Wednesday, it hit a new high of 81.93 against the US dollar for the fifth day in a row.

On Tuesday, the Indian rupee fell to a record low of 81.77 against the dollar

Following the US Fed’s rate hike last week, the rupiah fell 2.25%. So far this year, the Indian currency has lost 9.70% of its value against the US dollar, and since the start of the first rate hike by the US Fed on March 22, the rupee has fallen by 7, 10%.

On September 21, the US Fed made a third consecutive three-quarter point increase, pushing borrowing costs to the highest level since 2008 and signaling that they will continue to rise well above the current level, as it intends to bring inflation back to the target level of 2%. . Since the start of the year, the US Fed has made five consecutive rate hikes, bringing the federal funds rate to 3%-3.25% from zero.

Following the Fed’s rate hike, the dollar index gained 3.5%. On Monday, the dollar index hit a new 20-year high at 114.58 on expectations that the Fed would tighten monetary policy further to stamp out soaring inflation.

Besides the rupee, there are other major currencies including the British pound, euro and Australian dollar which have fallen 8-20% against the dollar so far this year. On Monday, the pound plunged to a record low of $1.0382 following the announcement by the new British government that it would implement tax cuts and investments to boost growth. Investors are worried about a massive tax cut package that is set to cost tens of billions of pounds in additional government borrowing and amounts to a risky gamble to avoid a looming recession.

Hot on the heels of the pound’s depreciation, the Bank of England said it would not hesitate to change interest rates as needed to bring inflation back sustainably towards the 2% medium-term target, according to media.

Meanwhile, the Australian dollar depreciated to around $0.65, the lowest level since May 2020. The Japanese yen, on the other hand, weakened to 144 to the dollar and is heading for its lowest level in 24 years, prompting authorities to issue further warnings the yen is falling just days after the government intervened in currency markets for the first time since 1998 to stem the yen’s slide, according to Trading Economics.

The euro, the official currency of 19 member countries of the euro zone, is still trading below the parity level of (1.0000) against the dollar. For the first time in nearly 20 years in July, the euro reached parity against the dollar. The last time this happened was in November 2002, when the euro was worth $0.99.

Back in India, the RBI is taking all possible measures to defend the rupee and as a result, India’s foreign exchange reserves are depleting faster. According to a Reuters report, the RBI is using its foreign exchange reserves at a faster rate than during the crisis period in 2013, as it tries to prevent an overshoot of the rupee.

On Tuesday, the Indian rupee fell to an all-time low of 81.742 rupees to the dollar.

The Reserve Bank of India sold a net amount of $38.8 billion of its foreign exchange reserves between January and July this year, according to the report, citing RBI data.

In 2013, the RBI sold a net $14 billion between June and September after the so-called tantrum – when US Treasury yields soared after the Federal Reserve said it would slow its pace. pace of bond buybacks – had put pressure on emerging market currencies, including the rupee.

Additionally, India’s foreign exchange reserves fell to a 2-year low of $545 billion from a high of $642 billion in October 2021, according to the report. Falling foreign exchange reserves and picking up imports mean that this pool is now sufficient to cover around nine months of imports, down from 16 months at the peak.

Foreign exchange reserves fell to $545 billion, their lowest level in 2 years

Foreign exchange reserves fell to $545 billion, their lowest level in 2 years

By the time of the taper tantrum, India’s foreign exchange reserve coverage against imports had fallen to less than seven months, according to Reuters.

Meanwhile, economists from SBI, UBS, Goldman Sachs, Barclays and Bank of Baroda predict that the RBI will provide 50 basis points in the next RBI’s bi-weekly monetary policy MPC scheduled for September 30. The Reserve Bank of India has lifted interest rates by 140 basis points this year, to 5.40%.

Below are some of the other key factors that are currently driving the Indian Rupee to an all-time low.

Rate hikes by major central banks

FIIs invest in Indian stocks or other emerging markets when they have excess liquidity (low borrowing costs). When US bonds pay close to 0% interest, foreign investors look for better investments all over the world. If emerging countries like India offer interest rates close to 6-7%, some of the excess liquidity will flow into Indian equities, which will strengthen the rupee.

The increase in capital flows will also support the financing of the current account deficit and will also contribute to the increase in official reserves. Right now, interest rates are rising and with growing fears of recession, most capital flows are coming back from emerging markets, including India, which is seriously affecting the rupiah.

Moreover, during the second rate hike, the US Fed announced the switch to quantitative tightening rather than quantitative easing.

widening trade deficit

India’s trade deficit in August widened to $27.98 billion from $11.71 billion in the same month last year. Sequentially, it moderated from a record high of $30 billion in July. In August, exports fell to $33 billion from the $40.1 billion and $36.3 billion recorded in June and July, respectively.

World crude oil and commodity prices have risen since the start of the Russian-Ukrainian war, and the shortage of coal in the domestic market has further pushed coal imports.

As the trade deficit continues to grow month after month, pressure is being put on the rupiah as many dollars are flowing out rather than coming in. This causes the rupee to weaken or depreciate while strengthening the dollar.

As exports fall, Standard Chartered has raised its estimate of India’s current account deficit forecast for the year ending March 2023 to 3.8% of India’s GDP from its earlier estimate of 3.0%, which is a higher projection than its peers Morgan Stanley, Goldman Sachs and Nomura.

Disclaimer: The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of MintGenie.

Here we explain why the rupee fluctuates against the dollar.

Here we explain why the rupee fluctuates against the dollar.