The rupee is yet again facing renewed pressure, along with major peers, as the dollar continues to strengthen in the wake of the Federal Reserve’s latest jumbo 75 basis points interest rate increase and the U.S. central bank’s unequivocal message that it remains squarely focused on taming inflation. The Indian currency weakened past the 81-mark against the dollar for the first time ever in Friday’s intraday trade, before ending the week at a new record closing low. The rupee’s slide was softened by the Reserve Bank of India’s intervention to smoothen volatility; the cumulative impact of such interventions over the 12 months through September 16 have shrunk the RBI’s war chest of foreign exchange reserves by almost $94 billion to $545.65 billion. The fact that the rupee is not alone in depreciating against the dollar can be of little comfort to Indian companies reliant on imports of raw materials or services for the smooth functioning of their businesses. They are struggling to contend with rising costs at a time when domestic demand is still to regain a durable post-pandemic footing.
So far in 2022, FPIs have in total dumped $20.6 billion of Indian equity and debt following three straight years of net investments. And the Fed’s projection of further steep monetary tightening, of at least another 125 basis points, is only likely to lead to more outflows over the last quarter of this year. With the rupee’s real effective exchange rate (REER), or trade-weighted average of its value, also signalling that the Indian currency is still overvalued, the RBI’s rate setting panel will have a fine tightrope to walk next week as it battles to restore a semblance of price stability without choking growth and by ensuring the rupee does not weaken too sharply.