Rupee breaks above 80 to the dollar for the first time, new economic challenges loom

MUMBAI (Reuters) – The rupee broke the 80 level against the dollar for the first time on Tuesday as crude oil prices rose in the international market late on Monday, posing a new challenge for authorities grappling with continued pressures on the costs.
Although the national currency has been trading within steps of the 80 level for several days this month, breaking the mark is considered a significant event as it was a psychological level at which the central bank had defended the currency. . Sellers had been holding back and waiting for this level, which sparked a round of dollar selling on Tuesday.
The depreciation of the rupee against the greenback is likely to affect all sectors and could increase the cost of imports, increase the costs of education abroad, make foreign loans expensive for companies and has the potential to fuel inflation, which already reigns at 7%. A positive impact could be that remittances from abroad could become attractive.

The rupiah broke the new high after a steady weakening of almost 7% since the Russian invasion of Ukraine in February. The dispute has kept crude oil prices consistently above the $100 level for five months, which has widened the current account deficit. At the same time, foreign institutional investors have been in exit mode, selling nearly $30 billion worth of stocks this year. This was also triggered by the sharp interest rate hikes by the US Federal in its fight against high inflation for more than four decades. The Rupee broke through the 80,851-day level after hitting 75 for the first time on March 20, 2020 during the selloff following the Covid-19 outbreak.
The rupee weakened even as the dollar reversed its gains against major currencies. Analysts said the odds of the US Federal Reserve raising interest rates by one percentage point have narrowed and many were forecasting a 75 basis point hike.
After trading as low as 80.06 in the morning session, the rupiah strengthened as the dollar index retraced its gains. The Rupee eventually stabilized at 79.95, a gain of three paise from Monday’s close.
Reacting to the movement in the exchange rate, Economic Affairs Secretary Ajay Seth said on Tuesday that there was no need to openly worry about the fall of the rupee and the RBI well managed in terms of volatility.
“The pressure on the rupee is still there. While the dollar index has moderated and pressure on other currencies has eased, the trend is for the rupiah to weaken,” said MP Hariprasad, Executive Director and Business Leader, Ebixcash World Money.
He added that at the 80 level, there is some selling pressure and the exchange rate may encounter resistance at the 80.25-80.30 levels, with the RBI letting the rupee gradually regain its level.
“People are unlikely to postpone their travel plans as the movement of the rupee is usually one-sided. At most, travelers can reduce their spending a bit,” he said.
According to KN Dey of United Financial Consultants, most outward capital flows have stopped due to the weakening of the rupee. This includes non-resident Indians, foreign investors and lenders for external commercial borrowings.
“If the rupiah is stable for a few days, we could see a reversal and the rupiah could see a correction to 79.30-79.50 on the upper side, I see, 80.40. US Fed rate of just 75 basis points on July 27,” he said. If the rate hike is a full percentage point, the dollar index would rise and pressure on the rupee would resume. .

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