Why Is the Rupee Falling? Can It Breach The 80 Mark?

The rupee is falling and falling fast. In the forex market today, the domestic unit opened at 78.12 against the previous close of 77.85 per US dollar and at the time of writing this copy the rupee was down to 78.24.

What is triggering a fall in the rupee?

One of the biggest reasons is the huge selling pressure by Foreign Portfolio Investors in the domestic stock market.

Until May 20, 2022, Foreign Portfolio Investors (FPIs) pulled out a whopping Rs 1,62,299 crore from the Indian equity market. The selling is unabated, which is causing havoc in the currency market. When these set of investors sell stocks, they repatriate, for which there is a need for buying US dollars, which adds to dollar demand and hence pressure on the rupee.

Now, why are they selling stocks in India is not too difficult to understand. There is monetary tightening happening across the globe. This week, the US Fed would meet to further increase interest rates by 50 basis points. When interest rates in the US rise, equities become less attractive, which is why FPIs dump stocks across emerging markets. When they dump Indian equities there is demand for dollars to repatriate the same, as explained.

The second biggest reason is that demand for dollars is needed for payment of imported crude. Two things have happened here: the import bill for crude is going to rise, because there is more demand for oil and second is crude prices itself have gone-up. This too is exerting pressure on the Indian rupee.

The only way to stop the slide of the rupee is for the RBI to intervene. Normally, the RBI intervenes by selling dollars. However, that would help to a limited extent as one does not want to exert pressure on the forex reserves.

In terms of whether the rupee would breach the 80 mark, is hard to say. A further selling pressure from FPIs in the domestic equities could push the rupee lower.

"The Fed officials may start signaling rate hikes beyond September and he US Dollar will rally towards $105 levels in that case. On the contrary a decline in the inflation number will trigger further correction in the greenback towards $99 levels. Further depreciation in the Rupee will be seen if levels around 77.80 starts to be breached consistently. This will open targets of 78.25 for the Rupee," the currency desk of Emkay Global said in a note last week.

It seems that level too is taken out now, and aggressive intervention from the RBI to stem the slide in the rupee is a possibility.