Inside out of Rupee's rout hitting all-time low Monday

MUMBAI - The rupee plunged to a record low Monday, tracking its peers from regional economies, as concerns mount over widening deficits in a large oil importer such as India, where the goal of ensuring export competitiveness could determine the extent of central bank intervention in the currency markets.

India's dependence on imported crude oil could expose the fault lines and rising fertilizer costs could lead to a wider fiscal gap. The rupee lost 0.72% Monday to close at 77.46 per dollar, breaking its erstwhile record of 76.97 reached on March 7 this year. During the day’s trading, the rupee extended its losses up to 77.53.

“With the Life Insurance share-sale event behind us, macro factors including oil, dollar strength and weakening peer currencies collectively brought the rupee under pressure,” said Bhaskar Panda, executive vice president, HDFC Bank. “We did not observe any desperate attempt to cut the rupee's rout. The local unit may continue to slide unless the broader trend changes.”

To be sure, the rupee may have fallen to record lows, but the currency still remains a relative outperformer among Asian emerging market peers, especially when compared with China. The Yuan has fallen 5.52% this year. The rupee lost more than 4% to the dollar this calendar year, ranking sixth among Asian peers.

The Reserve Bank of India (RBI) is said to have intervened through the futures market as it sought to protect forex reserves, dealers said. The quantum of intervention is estimated to be lower than $1 billion, the minimum needed to pre-empt wild swings.

"It was a measured intervention by the RBI on Monday," said the chief dealer at a large bank.

The Bloomberg Dollar Index, which measures the unit against other major currencies, shot up to 103.84, the highest level since December 31. 2002.

“The Dollar Index is going through the roof on the back of global investor risk aversion amid the Russia-Ukraine war and expectations of higher interest rates,” said Hemant Mishr, co-founder and CIO, SCUBe Capital, a Singapore-based Global fund. “The dollar rally is broad-based and in line with market fundamentals. The rupee cannot remain out of sync, particularly when the yuan is losing value sharply as this has implications on India’s export competitiveness.”

All top Asian currencies have depreciated against the dollar this year.

A loss in the local currency’s value means more per unit realisation for a country’s exports. The Chinese currency dropped 1.57% against the rupee in 2022.

“Macro dislocations coupled with the Fed hike is keeping the dollar index well-built,” said Ashhish Vaidya, managing director, DBS Bank India. “A risk-off sentiment is weighing on global investors amid global uncertainties.”

Global Brent crude oil prices soared nearly 60 percent this year to 109.24 Monday. This weighs on India’s consumer prices as the country is one of the largest importers in the world.

The Japanese yen plunged to the lowest in decades, with the unit losing 12.26% this year against the dollar. The Malaysian ringgit, too, fell behind the rupee with the currency losing 4.98%.

India’s fiscal deficit has been projected at 9.9% of GDP for FY23 as rising energy and food prices will put renewed pressure on the fiscal gap, according to the International Monetary Fund (IMF).

India's current account deficit (CAD) increased to $23 billion, or 2.7% of GDP, in the December quarter of FY22.