The rupee weakened to hit a fresh all-time low early on Monday, trading beyond 77.40 per dollar, driven by investors' preference for safety as lockdowns in China, war on the edge of Europe and fear about higher interest rates sent a nervous jolt through markets.
While on Friday, the Indian currency ended close to its all-time lows of 77.05 hit in March, it weakened sharply today and was last trading at 77.42 per dollar, according to the latest quote from PTI and Reuters.
The flight-to-safety trades have pushed the dollar's strength, with bids for the greenback accentuated since Russia attacked Ukraine late in February on supply disruption fears, leading to runaway inflation and higher global interest rates, bringing forward the next recession.
The dollar scaled close to its two-decade highs, gaining for a fifth consecutive week after the Federal Reserve hiked its benchmark funds rate by 50 basis points and strong jobs data on Friday reinforced bets on further big hikes.
The rate futures market is pricing in a 75 per cent chance of a 75 basis-point lift-off in June and a further 200 basis points of hikes this year.
US inflation data this week and several Fed policymakers scheduled to speak will keep the hawkish rhetoric in place as the Russia-Ukraine conflict in its third month shows no signs of letting up, boosting expectations for the dollar to be well-bid.
The net capital outflows have not helped the Indian currency, with foreign investors pulling out over 6,400 crore from the Indian equity market in the first four trading sessions of May and remaining net sellers for seven months to April 2022.
That has weighed on the Indian currency at a time when international crude prices have risen sharply and traded above $100 on average for the third month on supply disruptions from the Russia-Ukraine war.
The widening trade bill, as the country imports 85 per cent of its oil needs, a stronger dollar, elevated crude prices, surging inflation and expected tighter monetary policy have spooked investors.
While the RBI, in an emergency meeting last week, hiked its key interest rates, runaway inflation risks are rising even as fears of a slowdown in economic growth activity persist.
"With central banks worldwide pressing the panic button and increasing interest rates, "Foreign investors continue to sell relentlessly," Vijay Singhania, Chairman of TradeSmart, told PTI.
Despite the RBI raising rates, the expected interest rate differential dynamic and flight-to-safety trades point to a gloomy mood.
Reuters reported that "a series of rate hikes and hawkish communication came against a backdrop of plummeting Chinese and European activity, new plans for Russian energy bans and continued supply-side pressures," warned analysts at Barclays.
"This creates the gloomy prospect of persistent inflation, forcing central banks to hike rates despite sharply slowing growth."
Indian bourses too started May on a weak note, after losing over 2 per cent in April. With inflation data for April due and international developments not too appealing, broad investor sentiment points to more downside.
"We are victims of that time when the rupee is hitting an all-time-low for multiple reasons." To describe a few points: a stronger USD, weaker Asian currencies, rebound in oil prices, the ongoing Russia-Ukraine war, FII outflow, and a surprise hike by the RBI to tackle inflation could be the major reasons, "noted CR Forex Advisors."
"Friday's job report boosted the US yield and thus the DXY (dollar index). "Moving forward, the RBI's intentions will be closely watched," added CR Forex Advisors.