Rupee drops by 10 paise to close at 75.88 against dollar on inflation concerns

Mumbai: The rupee on Tuesday declined by 10 paise to close at an 18-month low level of 75.88 against the US dollar due to persistent foreign fund outflows and concerns over inflation.

Muted domestic equities and the dollar demand from corporates also weighed on the local unit, analysts said.

At the interbank foreign exchange market, the local currency opened at 75.94 against the greenback. During the day, the local unit witnessed an intra-day low of 75.95 and a high of 75.83 against the US dollar.

The rupee closed at 75.88 against the dollar, a level not seen since June 22, 2020.

In the previous session, the rupee had settled at 75.78 against the greenback.

On the domestic macroeconomic front, the wholesale price-based inflation surged to more than a decade high of 14.23 per cent in November, mainly due to hardening of prices of mineral oils, basic metals, crude petroleum and natural gas.

“Rupee weakened against the US dollar following risk-off sentiments and dollar demand from corporates for dividend payments. While foreign investors remain net sellers in domestic equities and debt,” said Dilip Parmar, Research Analyst, HDFC Securities.

“Overseas markets are struggling for direction, with conditions fairly quiet ahead of a FOMC meeting. Fed announcement to speed up asset purchases should continue to support the dollar while dovish decisions from RBI weighing on rupee,” Parmar added.

Nish Bhatt, Founder & CEO, Millwood Kane International said that there was a broad weakness across Asian markets ahead of the US Fed’s meeting that may announce an accelerated pace of liquidity tightening. A tapering by the US Fed will lead to an outflow of fund flows from emerging markets.

The inflation in the US has risen to a multi-decade high, posing a risk for the Fed to act sooner than expected.

“The weakness in the rupee is despite record RBI reserves of around USD 640 billion. The central bank has added over USD 60 billion in forex reserves in FY22. The latest retail inflation data in India hit a 3-month high,” Bhatt said.

The decline in the rupee has also been driven by the fear of the rapid spread of the Omicron variant. This is post the UK PM’s warning of a ‘tidal wave’ of new cases, and WHO stating it as a high global risk,” said Bhatt.

British Prime Minister Boris Johnson on Monday confirmed the UK’s first death from the Omicron variant of coronavirus, probably the first known fatality from the highly transmissible variant of COVID-19 in the world.

The next few days will be dominated by the US Fed, ECB, and BoJ as they meet to decide on their respective monetary policy. Central banks’ action on rate, liquidity, and the resolve to aid recovery in growth rate will guide global equities and currencies, Bhatt added.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, was trading 0.01 per cent down at 96.30.

On the domestic equity market front, the BSE Sensex ended 166.33 points or 0.29 per cent lower at 58,117.09 while the broader NSE Nifty fell 43.35 points or 0.25 per cent to 17,324.90.

Foreign institutional investors remained net sellers in the capital market on Monday, as they offloaded shares worth Rs 2,743.44 crore, according to the exchange data.