The Indian rupee hit a new lifetime low of 80.05 per US dollar on Tuesday amid unabated foreign fund outflows and high crude oil prices. At the interbank foreign exchange, the rupee opened at 80 against the US dollar, then slipped to 80.05, registering a 7 paise decline from its last close.
The domestic currency has been in a freefall for the past few weeks due to strengthening greenback and interest rate hikes by the U.S. Federal Reserve.
The rupee's all-time low of 80 per USD comes a day after finance minister Nirmala Sitharaman acknowledged in Parliament that the Indian rupee has fallen to a record low in comparison to the U.S. dollar during the month of June 2022.
The finance minister stated that global factors like the Russia-Ukraine conflict, soaring crude oil prices and the tightening of global financial conditions are the major reasons for the weakening of the Indian rupee against the U.S. dollar.
Sitharaman, however, pointed out that other currencies such as the British pound, the Japanese yen and the Euro have weakened more than the Indian rupee against the U.S. dollar and therefore, the Indian rupee has strengthened against these currencies in 2022.
The finance minister said the outflow of foreign portfolio capital is a "major reason" for the "depreciation" of the Indian rupee. "Monetary tightening in advanced economies, particularly in the United States of America, tends to cause foreign investors to withdraw funds from emerging markets. Foreign portfolio investors have withdrawn about $14 bn from Indian equity markets in FY 2022-23 so far," she said.
In the foreign exchange market, the Indian rupee depreciated by 1% month-on-month vis-à-vis the US dollar in June 2022 on the back of FPI equity outflows and strong US dollar, according to the Reserve bank of India. This was also mirrored in the movement of the 40-currency real effective exchange rate (REER) which depreciated by 0.6% in June 2022 over its level a month ago, the central bank says.
Earlier this month, the RBI put in place an additional arrangement for invoicing, payment, and settlement of exports and imports in the Indian rupee to support the increasing interest of the global trading community in INR.
As per the new framework, all exports and imports under this arrangement may be denominated and invoiced in rupee and exchange rate between the currencies of the two trading partner countries may be market determined.
Foreign brokerage Nomura expects the Indian rupee to fall to 82 against the dollar by the third quarter of 2022 amid widening trade deficit. Nomura projects the local currency to rise to 81 in the fourth quarter.
India's current account deficit is expected to further widen to 3.3% in the financial year 2022-23 from 1.2% in FY22, Nomura said, adding that the latest measures taken by the government on curbing gold imports by raising the import tax to 15% and export tax on petroleum products may not help in reining in the widening trade gap.
Aggressive tightening by the Federal Reserve can cause a recession in the US in the fourth quarter, Nomura warned, adding that such an environment is not conducive for emerging markets and Asian currencies that are dependent on healthy global growth and equity-related inflows, including INR.