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The Indian rupee extended its losses and touched an all-time low of 77.46 against the US dollar early on Monday weighed down by a strong greenback.
A demand for riskier assets and a fall in local equities are seen also as the reasons for the plunge.
“Speculations over the state-run banks’ dollar sales may have also fueled the rupee’s weakness. India's FX reserves have fallen below $600 billion for the first time in a year, weighed by persistent capital outflows and the dollar's broad surge in recent months,” said Arun Leslie John, Chief Market Analyst, at Dubai-based Century Financial.
Outflows from India continue to be on the uptick--foreigners have withdrawn a total of nearly $19 billion year-to-date from domestic markets, with equities seeing almost $18 billion worth of foreign money exiting, he added.
The downside risk to the rupee is set to continue over the short term.
"The (USD/INR) pair is expected to trade with a neutral to bullish bias on the back of firm dollar amid Fed’s aggressive rate hike expectations to curb inflation. Elevated crude oil prices and overall global uncertainty is expected to keep the rupee under pressure," said a note from IFA Global Research Academy.
According to John, the outlook remains bearish for the Indian currency. “The embargo on Russian oil by EU is a key factor that can further damage INR as the ban can further tighten global supplies of crude. Moreover, the INR may continue to be weighed by global growth worries due to lockdowns in China and aggressive policy tightening from other central banks. On the contrary, the heavily oversubscribed IPO of India’s largest insurance provider: LIC, and firmer activity numbers for March, could cap some USD/INR upside move.”
However, for now, as equity flows can dominate interest-rate sensitive flows, there is a high downside risk to the INR from a decline in equity market sentiments as a result of a rapid tightening in US financial conditions, John said.
The rupee was trading at 21.06 early on Monday against the UAE dirham.
The dollar index, which gauges the greenback's strength against a basket of six currencies, was last trading 0.43 per cent higher at 104.10 on expectations of further rate hikes by the US Federal Reserve.
(Reporting by Brinda Darasha; editing by Seban Scaria)
