Last Friday, the Rupee pared its initial gains and settled just 1 paisa higher at 77.49 against the US Dollar as inflationary concerns and the strength of the US currency weighed on the local unit. Traders said the rupiah consolidated in a narrow range as weak regional currencies and depressing economic data weighed on national unity, only to be bailed out by the Reserve Bank of India (RBI), limiting trade. additional losses. In the interbank foreign exchange market, the rupiah opened at 77.35 against the greenback and fell from 77.26 to 77.49 on the same day. Interestingly, the rupiah would eventually end at 77.49, up just 1 paisa from its previous close. The day before, the rupee plunged 25 paise to close at an all-time low of 77.50 against the US dollar.
Moving to the weekly timeframe, the rupee had depreciated by 57 paise on the back of a stronger dollar index due to risk sentiment and outflows of foreign funds. This affected the FX market timing activities in India and was felt by most traders. According to Dilip Parmar, Research Analyst, HDFC Securities, “Of all drivers, the liquidity factor is inevitably a key driver of recent market moves, and market participants are rushing for safe-haven assets.”
Palmar went on to add that as of Friday, risk appetite remained dismal, with the benchmark equity index erasing morning gains and the Rupee also yielding against the USD. Its weakness in regional currencies and depressing economic data weighing on the rupee, and only the intervention of the RBI which had limited the losses.
Struggling with inflation and looking at the bigger picture, India’s headline inflation entered its seventh month to hit an 8-year high of 7.79% last month, fueling higher prices food and fuel. This increased the chances of an interest rate hike by the RBI early next month to bring prices under control. While manufacturing output measured in terms of the Industrial Production Index (IPI) remained subdued at 1.9% in March, some economists believe that a further rise in interest rates after a 40 basis point increase last week could slow economic growth.
On the domestic stock market front, the BSE Sensex ended down 136.69 points or 0.26% at 52,793.62, while the broader NSE Nifty fell 25.85 points or 0.16% at 15,782.15. The dollar index, which measures the strength of the greenback against a basket of six currencies, fell 0.05% to 104.79. According to stock market data, foreign institutional investors were net sellers in the capital market last Thursday as they unloaded shares worth more than Rs 5,255 crore. Additionally, Brent, the global oil benchmark, jumped 1.56% to $109.13 a barrel.
Economists take inflation going
According to some economists, although a depreciated rupee may support exports, it could mean more pain for inflation as the transmission of imported inflation becomes higher. Holding global energy prices constant, a 2% depreciation of the rupee leads to a 10 basis point increase in headline inflation; After the rupiah fell to historic lows last week, the RBI surprised markets by raising the key rate by 40 basis points to 4.4% to fight inflation, which was the first hike in nearly of four years.
According to Sakshi Gupta of HDFC Bank, “the rupiah has finally broken out of its comfort zone. Holding global energy prices constant, a 2% depreciation of the rupee leads to a 10 basis point increase in headline inflation, representing only the direct impact on domestic fuel and electricity costs. energy.
Gupta thinks the total impact would be higher if the second-round impact on the prices of other goods and services were taken into account. The Chinese yuan, Japanese yen, Thai baht, Philippine peso, South African rand and Indonesian rupiah also depreciated.
Another economist who shares the same sentiment is Madan Sabnavis. He thinks that a 5% depreciation of the rupee will make imports expensive by 3 to 4 rupees per dollar. Thus, imported inflation will increase as the cost of coal, petroleum, edible oil and gold increases.