Rupee comes close to breaking 82 per mark on Fed rate hikes

It came close to breaking the 82 per mark on Wednesday as various officials said that the US central bank's policy tightening cycle had a long way to go yet.

It was at a new low of 81.94 per on Wednesday, a new low of 0.4 per cent. The domestic currency, which had settled at 81.58 per on Tuesday, touched an intra-day low of 81.95 per dollar.

If not for heavy market interventions by the RBI in the latter half of trade, the central bank is estimated to have sold more than $1 billion in the spot market on Wednesday - the would have weakened well past the 82 $1 level, currency traders said.

It is only because of the large intervention today that the dollar is here, otherwise we could have seen a move towards 82.50 per dollar. The interventions today will have crossed $1 billion, said Anindya Banerjee, VP, Currency Derivatives Interest Rate Derivatives at Kotak Securities. He sees the rupee in a range of 81.3 -- 82.5 per dollar in the coming days.

The rupee has weakened 9.3 per cent against the dollar so far in 2022. Since September 21, the rupee losses have been at a rapid pace since the announcement of a 75bps rate hike and signalled a longer than expected cycle of rate hikes.

The local currency has declined by 2.7 per cent against the dollar since that day, far worse than 11 other emerging market currencies. With the rupee s weakness showing few signs of letting up, importers rushed to purchase the dollar, which has worsened the rupee's fall, dealers said.

On Tuesday, several Fed officials including Minneapolis Fed President Neel Kashkari, San Francisco Fed President Mary Daly and St Louise Fed President James Bullard made comments, suggesting the need for more US rate hikes.

The Fed has hiked interest rates by 300 bps since March 2022, the most since its 2004-2006 rate hike cycle in order to tame 40 year high inflation in the US. The index has skyrocketed to 20 year highs as global funds have rushed to higher interest rates in the world's largest economy.

The US Fed is expected to increase 125 bps more by December 2022, due to the recent FOMC feeds, good US data and hawkish Fed speakers, which is also reflected in the 10 year UST rising to a 4 per cent, according to Shinhan Bank s vice-president Global Trading Centre Kunal Sodhani.

In the last five days, equity outflows from FII have been around $2 billion, he said. Sodhani sees the rupee in a band of 80.6 -- 82.5 per dollar in the coming days.

Due to the turmoil in the global financial markets due to the strengthening dollar, the interventions were increased in the latter half of the day to restore some calm in the rupee. The central bank is facing a rapidly depleted arsenal of foreign exchange reserves as it has been selling dollars aggressively over the last few months to protect the rupee.

The reserves were at a near-two year low of $545.7 billion as of September 16, which is slightly less than $631.5 billion as on February 25, the week that Russia invaded Ukraine.

The rupee movement is a function of what is happening overseas and overseas, and is a panic market, according to Banerjee.

When the market is broken, the volatility becomes unprecedented - when the market is broken, we see big moves on the upside for the dollar and then the authorities come in and intervene. He said that we had seen headlines about the Bank of England, for Korea, etc.