USD/INR: Rupee Hit Weakest Since April 26; Downside Risks Remain

The Indian rupee hit its weakest since April 26, depreciating by over 18 paise against the US dollar in early morning trade Friday amid weakness in domestic equity markets.

The dollar to rupee conversion today rose to 74.745 against the U.S. currency, up from Thursday’s close of 74.5625. The rupee has lost over 170 paise in June – posting the biggest monthly drop since March 2020, the early days of the pandemic, and weakened over 34 paise in the last two trading sessions.

“The Indian Rupee is expected to trade with negative bias amid strong dollar and muted domestic market sentiments. Further, Rupee may slip on disappointing macroeconomic data and surge in crude oil prices. Moreover, traders will remain vigilant ahead of Organization of the Petroleum Exporting Countries and its allies meeting outcome and US Job data,” noted analysts at Sharekhan by BNP Paribas.

“Furthermore, market participants are worried that spread of highly infectious Delta Variant of virus may derail global economic recovery. However, sharp fall may be prevented as number of COVID-19 cases in India continued to decline. India reported daily new COVID-19 cases below 50K mark for 4th consecutive day. The USD to INR spot expected to trade in a range between 74.30 on lower side to 74.75 on higher side with upward trend.”

It is worth noting that sustained foreign fund outflows, higher oil prices and firm U.S. dollar will continue to weigh on the rupee.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.05% lower at 92.555 – rose to a 2-1/2-month peak on Wednesday, posting its biggest monthly rise since November 2016.

The dollar is expected to rise over the coming year, largely driven by the Fed’s dot plot released last week, which suggested an expectation of two rate hikes in 2023. A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected push the USD to INR pair higher.

“US Dollar is expected to trade with positive bias on expectation of improved economic data from US. US Job reports are likely to show that labor market is recovering. US Non-Farm Payrolls data is forecasted to show that number of jobs added in economy in June 2021 increased to 700K compared to preceding month. Market participants fear that strong labor market and rising inflation pressure may force Federal Reserve to start reducing monetary stimulus sooner rather than later,” Sharekhan’s analysts’ added.

“Moreover, Dollar may gain strength on divergence in global monetary policies and on concern that spread of highly infectious Delta Variant of virus may derail global economic recovery. Furthermore, rapid vaccination program will lead to economic reopening.  However, sharp upside may be capped on rise in risk appetite in the global markets and decline in US treasury yields. Further, Fed Officials differ in view on how long inflation is likely to stay high and when to tighten monetary policy.”

The benchmark equity indices the BSE Sensex was down 54 points or 0.10% at 52265.93, and the Nifty was down 13.55 points or 0.09% at 15667.00.

However, foreign institutional investors were net sellers in the capital market on Thursday as they offloaded shares worth Rs 1,245.29 crore, as per exchange data. Global oil benchmark Brent futures fell 0.22% to $75.67 per barrel.