Indian rupee braces for worst as Fed hints at more rate hike

The Indian rupee is likely to fall further after hitting a record low of 80.70 against the dollar or 21.95 against the dirham on Thursday as the US Federal Reserve hinted at more aggressive rate hikes to tame inflation.

The rupee opened at a record low of 80.2850 per dollar on Thursday, down from 79.9750 in the previous session as the Fed raised rates by 75 basis points.

Currency analysts said the worst is yet to happen for the Indian currency as the Fed hinted that more hikes were coming and that rates would stay elevated until 2024. Other Asian currencies also opened weaker, with the Chinese yuan slipping below 7.10 to the dollar.

Krishnan Ramachandran, CEO, Barjeel Geojit Securities, said as Fed rates are expected to increase by another 125 basis points in the next few months it is very likely that the Indian unit will be close to 82 levels or more by end of the year.

“The rupee presently is in the range at 80.80 levels and it is expected that in the near term it will breach the 81 barrier and likely to trade in the range of 81.40-50 given the sharp uptick on the Dollar Index which is close to 111 levels and expectations are that the greenback will continue to appreciate against all currencies. Fed rates are expected to increase by another 125 basis points in the next few months and it is very likely that the rupee will be close to 82 levels or more by end of the year,” said Ramachandran.

A LuLu Exchange spokesperson said the Fed rate hike of 0.75 per cent was in line with the expectation of the markets. All the US markets tumbled and closed with a significant loss, and major currencies lost significantly against the dollar. Asian markets, including India’s, followed the trend and opened lower.

“Since the Indian rupee follows other major currencies, the fall was natural. The rupee has tested a new low of 80.70 against the dollar (21.95 against the dirham), and the fall is ongoing. This is beyond today's expectations, and we feel that it might test 80.90-81.00 (around Rs22 against the dirham), since it has breached the 80.60 mark. Naturally, remittances to this corridor are expected to go up, as people look to take advantage of this fall,” the LuLu spokesperson added.

Samir Lodha, managing director at QuantArt Market Solutions, said more losses were in store for the rupee if the Reserve Bank of India decides to step back.

"Once the RBI allows the rupee to trade beyond 80 on a consistent basis, I expect the rupee to head towards 82.0 in a couple of months on account of the trade deficit and due to global recession and money supply tightening," Lodha said.

Most analysts are of the view that a possible intervention by RBI may be less aggressive this time. However, it is possible that rupee will depreciate further with RBI intervention to control it whenever required, said Venkatakrishnan Srinivasan, founder and managing partner at Rockfor Fincap.

Dilip Parmar, research analyst at HDFC Securities, said that "even if the RBI steps in, it will be a temporary support and it cannot change the direction."

Arnob Biswas, head FX at SMC Global Securities, said RBI may not be aggressive considering the hawkish side of Fed. On top of that, substantial drop in net liquidity in the system may warrant it."

— issacjohn@khaleejtimes.com