The Indian rupee depreciated by 20 paise to settle at a new record low of 94.88 against the US dollar on Thursday, marking its weakest closing level ever. The decline was attributed to sustained demand for the greenback from importers and foreign portfolio investors, coupled with a stronger dollar index in global markets.
Market Dynamics
Forex traders noted that the rupee opened weaker and remained under pressure throughout the session as the dollar index, which measures the greenback against six major currencies, edged higher. Additionally, concerns over persistent inflation and widening trade deficit weighed on investor sentiment. The domestic equity markets also ended in negative territory, with the BSE Sensex dropping over 300 points, further dampening risk appetite.
Factors Behind the Fall
- Strong Dollar Demand: Importers, especially oil refiners, rushed to buy dollars to meet their monthly obligations, adding to the rupee's woes.
- Foreign Fund Outflows: Foreign institutional investors (FIIs) remained net sellers in the capital market, pulling out funds amid global monetary tightening.
- Global Cues: The US dollar strengthened against major currencies after hawkish comments from Federal Reserve officials, signaling further interest rate hikes.
Impact on Economy
A weaker rupee makes imports costlier, potentially fueling inflation. It also increases the burden of external debt servicing. However, export-oriented sectors like IT and textiles may benefit from better margins. The Reserve Bank of India (RBI) is likely to intervene in the forex market to curb excessive volatility, though its ability to stem the slide is limited given the global dollar strength.
Expert Views
Analysts expect the rupee to remain under pressure in the near term, with the next support level seen at 95.00. They advise that the RBI may use its forex reserves to smooth out sharp movements, but a sustained reversal would require a moderation in global dollar demand and improved domestic macroeconomic fundamentals. The rupee has depreciated over 10% against the dollar so far this year.
In the interbank forex market, the rupee opened at 94.70 and touched an intraday low of 94.92 before closing at 94.88, down 20 paise from the previous close of 94.68. The currency had earlier hit a record low of 94.72 on Tuesday.
