The Indian rupee fell 42 paise to hit an all-time low of 79.37 against the US dollar amid fears of a wider current account deficit and unabated foreign fund outflows.
The local currency opened at 79.04 against the greenback at the interbank forex exchange and witnessed an intra-day high of 79.02 and a low of 79.38.
It finally closed at 79.37, down 42 paise over its previous close. On Monday, the rupee had closed at 78.95 against the US dollar.
This comes at a time when India's merchandise trade deficit jumped to $25.6 billion in June 2022.
Foreign brokerage Nomura expects the Indian rupee to fall to 82 against the dollar by the third quarter of 2022 amid unrelenting capital outflows and widening trade deficit. Nomura expects 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 says, 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.
"Gold import demand is less sensitive to higher taxes, while export taxes could moderate oil exports," it says.
Aggressive tightening by the Federal Reserve can cause a recession in the US in the fourth quarter, Nomura says.
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, the brokerage adds.
"We are also somewhat concerned about the RBI's apparently ambivalent commitment to its 4 percent inflation target, which could further discourage FPI into the local bond market (year-to-date net foreign outflows of $2 bn)," the analysts say.
India's merchandise imports are expected to accelerate on the back of escalated commodity prices and higher rupee depreciation in FY23, according to India Ratings and Research.
Merchandise exports in June 2022 soared 16.78% to $37.94 billion compared with $32.49 billion in June 2021, the Ministry of Commerce & Industry data shows.
India's merchandise export in April-June 2022-23 stood at $116.77 billion, an increase of 22.22% compared with $95.54 billion in April-June 2021-22.