Although the domestic currency has been trading a few paise short of the 80 level on several days this month, breaching the mark is seen as a significant event as this was a psychological level at which the central bank had been defending the currency. Sellers had been holding back and waiting for this level, which triggered a round of dollar sales on Tuesday.
The depreciation of the rupee against the greenback is likely to have repercussions across sectors and could increase cost of imports, raise overseas education costs, make foreign loans costly for companies and has the potential to stoke inflation, which is already ruling at 7%. One positive impact could be that remittances from overseas could become attractive.
The rupee crossed the new milestone following a steady weakening of nearly 7% since the Russian invasion of Ukraine in February. The conflict has kept crude oil prices persistently high over the $100 level for five months, which widened the current account deficit. Simultaneously, foreign institutional investors have been in an exit mode, selling nearly $30 billion of equities this year. This has also been triggered by the sharp interest rate hikes by the US Fed in its fight against over-four-decade-high inflation. The rupee crossed the 80 level 851 days after it hit 75 for the first time on March 20, 2020 in the sell-off following the Covid-19 outbreak.
The rupee had weakened even as the dollar retraced gains against major currencies. Analysts said the chances of the US Federal Reserve hiking interest rates by one percentage point have reduced and many were forecasting a 75-basis-point hike.
After trading at a low of 80.06 in the morning session, the rupee firmed up as the dollar index retraced gains. The rupee finally settled at 79.95, a three-paise gain over Monday’s close.
Responding the exchange rate movement, economic affairs secretary Ajay Seth said on Tuesday that there was no need to get overtly worried about the fall in the rupee and the RBI well managed it in terms of volatility.
“The pressure on the rupee is still on. While the dollar index has moderated and pressure on other currencies has eased, the trend is for the rupee to weaken,” said Hariprasad M P, executive director and business head, Ebixcash World Money.
He added that at the 80 level, there is some selling pressure, and the exchange rate could meet resistance at 80.25-80.30 levels with the RBI letting the rupee find its level gradually.
“It is unlikely that people will put off their travel plans as the rupee movement is generally one-sided. At most travellers may curtail spending a bit,” he said.
According to K N Dey of United Financial Consultants, most overseas capital flows have reached a standstill because of the rupee weakening. This includes non-resident Indians, foreign investors and lenders for external commercial borrowing.
“If the rupee is steady for a few days, we may see a reversal and the rupee could see a correction to 79.30-79.50 on the upper side I see, 80.40. But this is subject to the US Fed hiking rates by only 75 basis points on July 27,” he said. If the rate hike is a whole percentage point, the dollar index would rise, and the pressure on the rupee will resume.