Rupee Falls Below 76 Against Dollar Ahead Of Fed Meet
Rupee weakens as dollar strengthens, outflows gather pace.
The Indian rupee fell below 76 against the U.S. dollar, trading at its lowest in 18 months. A stronger dollar ahead of a meeting of the U.S. Federal Reserve and an acceleration of foreign portfolio outflows pushed the rupee lower.
The currency opened at 76.07 against the dollar, down 0.3% from its previous close. Over the course of the session, the rupee weakened further to close at 76.23 against the dollar, down 0.5% over its previous close.
Overnight, the U.S. dollar strengthened to a one-week high as nervousness rose around spread of the Omicron virus and volatility rose ahead of the Federal Reserve's meeting. Accelerating inflation may prompt the U.S. central bank to speed up tapering of bond purchases.
"While the market has highly discounted hawkish actions from the U.S. Federal Reserve by means of a quicker wrap-up to the stimulus program, the way the policy meetings pan out in other parts of the world will be a crucial factor in driving the movement in the forex market this week," said Imran Kazi, vice president at Mecklai Financial Services, in a note on Dec. 14.
Kazi expects the rupee to trade in a range of 75.80-76.20 against the dollar.
Local factors are playing a role in the Indian currency's weakness as well.
India reported a record high trade deficit for November at $22.9 billion as export growth slowed. A wider trade deficit may push the current account deficit to above 2% of the GDP in the October-December quarter, economists said.
Foreign portfolio flows have also accelerated.
"Theoretically, the exchange rate is determined by the demand and supply for dollars which are based on fundamentals. Hence, when there is a wider trade deficit and capital flows are weak resulting in some outflow of dollars, the rupee should weaken," said CareEdge in a report dated Dec.14.
While almost $59 billion in forex reserves have been added since March, there has been an outflow in the last week, the rating agency's research unit pointed out. "Add to this the fact that the U.S. dollar is strengthening given the growth impulse as also the expectation of withdrawing of QE and increasing of interest rates, the rupee faces a double whammy."
