The Indian rupee tumbled to a record low of 77.63, weighed by a slump in equities amid concerns that accelerating inflation may eat into company earnings. Foreign funds have pulled out more than $19 billion from Indian equities this year as surging inflation and the prospect of aggressive monetary tightening by the Federal Reserve roiled global markets. Concerns about a darkening economic outlook reverberated around markets and weighed on emerging market currencies. Meanwhile, RBI raised its benchmark rates by 40 basis points to 4.40 percent in an off-cycle meeting on 4th May, which did little to strengthen Rupee. On the domestic economic front, the annual inflation rate in India increased to 7.79% in April, the highest since May 2014 and above market forecasts of 7.50% as food inflation accelerated for the 7th straight month to 8.38%. Meanwhile, India’s trade deficit was revised slightly higher to USD 20.11 billion in April of 2022, compared to a preliminary estimate of USD 20.07 billion and USD 15.29 billion a year earlier. RBI is reportedly intervening across all markets to defend the currency, as Rupee is under pressure due to heavy outflow by foreign investors and India’s forex reserves declined by $1.774 billion to $595.954 billion for the week ended 6th May.
The dollar index is hovering near a 20-year high and shows no signs of easing, on expectations of a 50 basis points rate hike in the next two meetings. Crude oil prices stay elevated and is trading near $110 per barrel, putting further pressure on India’s trade deficit. Negative terms of trade shock from high commodity prices and slowing capital flows continue to weigh down on Rupee. However, RBI might continue to intervene in the forex markets and alleviate any sharp slump. On the domestic front, WPI data and RBI meeting minutes due this week can be closely watched. US Retail sales and industrial production data will be also be in key focus. We expect Rupee spot to depreciate towards 77.7 levels amid broad dollar strength.
Royce Vargheese Joseph
Management Trainee, Commodity