The Indian rupee witnessed a sharp decline on Wednesday, breaching the psychologically significant 94 per US dollar mark and settling 33 paise lower. This marks a fresh all-time low for the domestic currency, which has been under sustained pressure due to a combination of domestic and global factors.
Massive Selling in Domestic Equities
Forex traders attributed the rupee's fall to massive selling in domestic equities and relentless withdrawal of foreign funds. The benchmark equity indices ended deep in the red, with the BSE Sensex plummeting over 800 points and the Nifty 50 sliding below the 24,000 mark. The sell-off was broad-based, with losses across sectors.
Foreign Fund Outflows Intensify
Foreign portfolio investors (FPIs) have been consistently pulling money out of Indian markets, driven by rising interest rates in developed economies and a strengthening US dollar. In the past week alone, FPIs have sold equities worth over $2 billion, adding to the pressure on the rupee.
The relentless outflow of foreign funds has been a major drag on the rupee, as it reduces the demand for the domestic currency. Traders noted that the dollar demand from importers and corporates further exacerbated the situation.
Global Dollar Demand Weighs
On the global front, the US dollar index surged to a multi-year high, buoyed by expectations of further monetary policy tightening by the Federal Reserve. The greenback's strength against major currencies made emerging market currencies like the rupee less attractive.
Additionally, rising crude oil prices, which have crossed $90 per barrel, added to India's import bill and widened the trade deficit, putting further downward pressure on the rupee.
Rupee Loses Over 1% in a Week
The domestic unit has now lost over 1% in the last week, reflecting the sustained selling pressure. The rupee opened weaker at 93.85 per dollar and touched an intraday low of 94.12 before closing at 93.98, down 33 paise from the previous close of 93.65.
Market participants expect the rupee to remain under pressure in the near term, with the 94.50 level being the next key support. The Reserve Bank of India (RBI) is likely to intervene periodically to curb excessive volatility, but its ability to stem the decline is limited given the strong global dollar demand.
Impact on Economy
A weaker rupee makes imports costlier, which could fuel inflation, especially in a country like India that relies heavily on imported crude oil. However, it could benefit exporters by making their goods cheaper in international markets. The IT sector, which earns a significant portion of its revenue in dollars, is expected to see a positive impact on margins.
The government and the RBI are closely monitoring the situation and may take additional measures if needed, traders said. However, with global factors largely driving the currency's movement, any sustained recovery in the rupee may depend on a reversal in the dollar's strength and a stabilization in foreign fund flows.
