The Indian rupee hit an all-time low of 78 against the US dollar in early trade on Monday after U.S. inflation data raised expectations of interest rate hikes by the Federal Reserve to combat inflation.

The local currency plunged 36 paise to a record low of 78.29 against the greenback as the surging U.S. inflation pushed the dollar and the benchmark bond yields higher.

Consumer prices in the U.S. rose 8.6% year-on-year in May, the highest rate since 1981. Global markets fear further rate hikes by the US Federal Reserve, which will meet on Wednesday to take a call on the key policy rates.

The fall in the rupee comes as Indian equity benchmarks – the Sensex and the Nifty 50 – dropped 2.5% each on Monday.

"The dollar index surged higher in Asian trade, lifted by strong U.S. yields amid speculation that the Fed could continue its aggressive monetary policy path in the second half of the year to curb inflation," says Sriram Iyer, senior research analyst at Reliance Securities.

"The Federal Reserve and the Bank of England are expected to raise rates at their meetings and there is a chance the Swiss National Bank will also hike, but little change is expected from the Bank of Japan," Iyer adds.

Meanwhile, India will announce its consumer price inflation numbers later today.

The Reserve Bank of India last week hiked its inflation projection for the financial year 2022-23 to 6.7% from 5.7% earlier on the back of rising crude oil prices.

"The tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook," the central bank said.

After the recent reduction in excise duties, domestic retail prices of petroleum products have moderated. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices, the central bank noted.

RBI's projections indicate that inflation is likely to remain above the upper tolerance level of 6% through the first three quarters of 2022-23.

On the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, inflation is now projected at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, the Reserve Bank said.

CPI headline inflation rose from 7% in March 2022 to 7.8% in April 2022, reflecting. Food inflationary pressures accentuated, led by cereals, milk, fruits, vegetables, spices and prepared meals. Fuel inflation was driven up by a rise in LPG and kerosene prices.

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