Indian rupee
Indian rupee has plunged to a two-year low of 20.81 closer to an all-time low 20.84 recorded on April 16, 2020 against the UAE dirham. Image Credit: Bloomberg

Dubai: Indian rupee has plunged to a two-year low of 20.81 closer to an all-time low 20.84 recorded on April 16, 2020 against the UAE dirham.

In the interbank market the rupee is trading in the range of 20.70 and 20.80 a dirham.

The Indian currency tumbled to 76.46 to a dollar late on Friday, tracking surge in crude prices. Historical data shows the Indian rupee plummeted to an all-time low of 76.88 against the US dollar on April 16, 2020.

Any decline in rupee’s value against the US dollar is automatically reflected in its exchange rate against the UAE currency because of the dirham’s peg to the US currency.

Data last week showed that India’s economy grew at a slower pace than the previous two quarters, and below market expectations, amid growing fears that fallout from Russia’s invasion of Ukraine may further dent economic growth.

Oil takes toll

Indian bond yields edged higher while the rupee continued to weaken on Friday, tracking a sharp rise in global crude oil prices that threatens to push up domestic inflation and widen the country’s current account deficit weakening rupee’s outlook .

India imports more than two-thirds of its oil requirements and rising crude will push up imported inflation while also widening the country’s current account deficit. The fallout from the Russia – Ukraine war are expected to drive up energy, metals and grains prices higher.

With Russia’s invasion entering a deadly new phase, which could result in more sanctions and further spike in energy prices, analysts expect further pressure on Indian rupee.

Equity dynamics

Selling pressure on domestic equity markets and capital flight resulting from foreign institutional investors turning net sellers on Indian equity markets are adding further downward pressure on the rupee.

Foreign portfolio inflows have helped boost the Indian rupee at the start of 2022. Factors such as rising inflation, higher crude prices and elevated US dollar are likely to result in further pull-back of foreign investors from the market resulting in more downward pressure on rupee.

Limited scope for intervention

Despite the sharp decline in rupee’s exchange rate against the US dollar last week, in the interbank market the Reserve Bank of India (RBI) did not intervene, signaling further downward pressure on rupee.

Although India has a forex reserve of $632.952 billion, the central bank is unlikely to make big interventions to prop up rupee as global macro-economic drivers combined with domestic economic compulsions are driving the currency down.

Analysts say, Faced with concerns on economic growth RBI is likely to keep a loose monetary policy stance overlooking inflation arising out of the war and rising oil prices, and these could apply further pressure on rupee in the coming weeks.