Rupee falls to new record low. Here’s all you want to know

The Indian rupee hit a fresh low against the US dollar on Wednesday even as local stock markets continued to be in the red and foreign institutional investors continued their retreat from the country.

The rupee went below the psychological Rs 79 to the dollar mark, significantly below the Rs 78.77 it had settled on at the end of trade on Tuesday.

How much has the rupee lost over the last few months?

So far in 2022, the rupee has shed around 5.8% against the dollar as higher US interest rates and a surge in global commodity prices have the outlook on the currency.

How much have FIIs net sold so far in June?

Foreign Institutional Investors have net sold $6.3 billion of stocks so far in June, the largest monthly outflow so far in 2022. So far in the calendar year, foreign investors have net sold $28.3 billion of equities.

What has the RBI been doing to stem the rupee’s slide?

The RBI is said to be intervening in the foreign exchange market around current dollar/rupee levels. But analysts and experts say the central bank may need to change the way it seeks to slow the rupee’s decline. They say its current method of intervention in the forwards market is now only accelerating the currency's fall.

The RBI has sold dollars in the spot market and simultaneously bought and sold in the forwards market.

According to a report by The Economic Times newspaper, traders say the RBI's actions in the onshore forwards market have led premiums to crash sharply with the 1-year annualised forward premium now below 3%, levels last seen in November 2011, wiping out carry trade gains and pressuring the spot rupee price lower.

They say technical conditions have made forward market intervention a less-than-ideal tool for managing rupee volatility and left the RBI with fewer options to reduce the risks of capital flight.

So, what could the RBI do going forward?

RBI could make greater use of spot market intervention - which would run down central bank reserves - or may just opt to let the rupee weaken according to macroeconomic fundamentals.

At $590.6 billion, the reserves give RBI enough firepower to halt the slide in the currency but it is unlikely to intervene aggressively against fundamentals.

The rupee was market-determined, but the RBI would not allow "runaway depreciation" in the currency, its chief Shaktikanta Das said last month.

How has the rupee done vis-a-vis its Asian peers?

The rupee has held up relatively better than its Asian peers on account of the central bank intervention but with a widening trade and current account deficit (CAD) and sustained foreign portfolio outflows, the downward pressure has intensified.

What do analysts have to say about the falling forex reserves?

Falling FX reserves, persistently high commodity prices, limited exchange rate pass-through to inflation and elevated INR valuations will likely tilt the balance towards a less interventionist FX policy in the coming months, Madhavi Arora, senior economist at Emkay Global said.