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Rupee breaches 78/$ level for first time, plunges to all-time low of 78.28

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MUMBAI: The rupee hit a new low of 78.28 in intraday trade and closed below the 78 level for the first time on Monday as foreign investors sold in the equity markets over fears that the US Fed may hike interest rates further.
A forex dealer said that markets were beginning to factor in a further 75-basis-point-increase in interest rates in the United States.
The rupee opened weak, breaching the 77 level as foreign investors sold Indian shares. It crashed to 78.28 in intraday trade before closing at 78.04, 20 paise below Friday’s close of 77.84.
It was not just the rupee, many other currencies, including the Japanese yen, Australian dollar and UK pound, fell against the dollar. The dollar index almost touched 105, with most currencies weakening against the greenback. Bankers say that even if the currency of India’s trading partner has depreciated along with the rupee, imports would still be costlier as billing is in dollars, and most importers do not have bargaining power.
On Friday, the US reported inflation at 8.6% in May, the fastest since December 1981. The trigger for the increase in prices was the shortage caused by the Russian invasion of Ukraine and China’s lockdowns.
“The weakening of the currency is not India specific, the rupee has still outperformed. The 8.6% US inflation has spooked the markets. The market is expecting a sharper and faster increase in interest rates to bring real rates (interest adjusted for inflation) close to neutral,”said Ashhish Vaidya, head of treasury and markets at DBS Bank.
According to Vaidya, higher interest rates could trigger a recession because of the high level of borrowing globally. While private borrowing is not a problem in India, the high government borrowing will result in interest rate dampening growth. A growth slowdown will cause inflation to take a pause, but the supply side issues will keep pressure on prices until the conflict ends.
“Inflation may sober down a bit, but it is not going away in a hurry. The transmission of higher fuel/coal into electricity takes time. When that happens, it can trigger the services inflation,” said Vaidya.
The increase in the value of the dollar will make all imports expensive. It will add to inflation. While a weak rupee is profitable for exporters, the current macroeconomic environment will make it difficult for exporters to convert the favourable exchange rate into demand.
Rating agency Moody’s recently said that four rated companies together have around $2.5 billion of rated US dollar bonds maturing over the next 12 months through May 2023. Vedanta Resources accounts for a large portion of the upcoming maturities, the rating agency said.



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