The domestic currency plunged to a new all-time low of 80.88 against the US dollar today. The rupee depreciated to a fresh record low from 79.97 in the previous session, its biggest single-day fall since February 24.
The fall comes in the backdrop of a record rise in the US dollar, which hit a two-decade high in overnight trade, after the U.S. central bank on Wednesday raised key interest rates by 75 basis points (bps) for the third straight time, taking the policy rate to 3-3.25%.
Heightened geopolitical risk due to Russia's war in Ukraine has also dampened investors' risk appetite. Other factors that caused the rupee to fall are firm crude oil prices, the muted trend in domestic markets and the solid performance of the USD against other major currencies like the Euro, Pound, and Yen.
The US Federal Reserve has vowed to continue with its "aggressive" policy stance to curb inflation and expected the policy rate to rise to 4.4% by year's end and 4.6% by the end of 2023.
"As we look ahead, more than the rate decision, markets would be closely eyeing economic projections by the US central bank, which will provide further direction to the Indian rupee," says Sugandha Sachdeva, vice president - commodity and currency rResearch, Religare Broking Ltd.
Following the US Fed suit, the Bank of England has also raised key interest rates by 50 basis points to 2.25% from 1.75%. It is the 7th consecutive hike by the BoE, raising the key policy rates to their highest level since 2008. The British central bank also committed to "respond forcefully" against the spiralling inflation.
Bucking the trend, Japan's central bank has confirmed it could maintain its ultra-loose monetary policy, being the only country with negative interest rates. Apart from the UK, Switzerland and Norway have also raised interest rates.
At home, the RBI, in its upcoming policy meeting on September 28-30, is also expected to raise the repo rate by up to 50 bps to 5.4% as inflation concerns remain high. In the past three meetings since May, the RBI's MPC has raised key lending rates by 140 bps.
Discontinuing from its downward trajectory, India's retail inflation rose around 0.52% to 7% in August, which is expected to influence the RBI's upcoming policy stance.
The RBI says it remains focused on reducing inflation but thinks it would remain above the tolerance band (4% +/-2%) for the first three quarters, with some kind of relief expected only in the fourth quarter of FY23.
On rupee freefall, the RBI governor this month said the rupee depreciation is among the lowest in the world, and that the domestic currency has moved in an orderly manner in the ongoing financial year. The Das-led MPC has estimated that retail inflation is expected to remain at 6.7% in FY23 and will reduce to 5% in FY24.