NEW DELHI: The dollar index is at a twenty-year high, reflecting the ongoing interest rate hikes by US Federal Reserve and the continuing geo-political risks.

While Foreign Institutional Investors (FII) outflows have been halted, Suman Chowdhury, Chief Analytical Officer at Acuite Ratings & Research, stated that "the expanded trade and current account deficit, along with such an environment, have kept the pressure on the rupee, which continues to hover around 80." Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares and Stock Brokers, stated that from R. One of the least among the main nations (both established and emerging market), the rupee depreciated by only 6 percent versus the dollar in the previous year, which caused it to appreciate against the majority of other currencies.

Indonesia, South Korea, and India have traditionally displayed the strongest negative susceptibility to USD strength among EM Asia equity markets. According to a report from Emkay Global Financial Services, the two industries that have historically suffered the most in India are real estate and finance and healthcare.

The RBI will need to review its FX intervention approach in light of the INR's close to outlier status in the Asia FX decline. It advised against overemphasising the newly emergent bilateral imbalances (which are swiftly declining) with regard to the Chinese Yuan (CNY).

"We envision the Indian Rupee hitting a low of 82 against the US Dollar, before recovering to the sub-79 area. We believe RBI will finally let the currency rate respond to new realities, although in an orderly manner, letting it work as an automated macro stabiliser to the policy reaction function," the report added.

At the Jackson Hole symposium, US Fed Chairman Jerome Powell gave a hawkish speech in which he suggested that rate hikes would continue and higher rates would be maintained for an extended term.

The portion of the market that was pricing in a rate decrease by the Fed at the first indication of economic weakness was severely rebuffed by Powell's speech. Market forecasts for the US Fed Funds rate have increased to 4 percent from 3.5 percent a week ago.

Other central banks in that region of the world, such as the European Central Bank, the Bank of Canada, and the Bank of England, have expressed similar hawkishness in their remarks. Every meeting, all raise their own policy rates by 50 to 75 basis points.

Mr. Pathak said, this is hardly a climate that encourages international investors to fund projects in developing nations. Hajra said the broad-based strengthening of the dollar against most currencies suggests that the depreciation of the rupee is more due to dollar strength than rupee weakness. "Thus, we do not expect large inflows from foreign investors immediately even if India gets inducted into the global bond indices," he said. Geopolitical unpredictability and the quick tightening of monetary policy by central banks in reaction to high inflation have made investors risk averse are two factors contributing to the strength of the dollar. Demand for dollars has risen as a result of the assumption that the dollar is a more secure currency during times of world unrest.

The US central bank is boosting the monetary policy rate more quickly than most other countries as a result of greater inflation in the nation. Demand for dollars soared as US interest rates rose more quickly than those elsewhere in the globe.

The reasons for rupee slump include every USD 1 increase in crude oil price per barrel leads to a USD 2.5 billion rise in India's yearly oil import bill. With a major rise in international crude oil prices, India's oil imports jumped putting stress on the rupee to depreciate, Hajra said.

Due to the unpredictability of the world, international portfolio equities investors withdrew USD 200 billion from key nations between January and March 2022. USD 14 billion was taken out of India in addition to significant withdrawals from the US, France, and Japan. Foreign portfolio investors have pulled USD 29 billion from Indian equities so far in 2022. The significant outflow also made the currency weaker.

However, the end of the dollar's strength is anticipated. The US economy is suffering from the dollar's rapid strengthening since it makes exports less competitive and imports more affordable. The US GDP growth became negative from January to March 2022 as a result of a large trade deficit. The demand for dollars would be reduced even if global uncertainty only slightly decreased.

aLSO, since the peak, oil prices have already fallen by 15 percent. By the end of 2022, the US Energy Information Administration projects that crude oil prices will have fallen another ten to fifteen percent, to around USD 90 per barrel. India's oil imports might be reduced by USD 100 billion annually if the price of oil falls from its recent peak of USD 130 per barrel to USD 90. According to Hajra, this would significantly lessen the pressure on the rupee to appreciate.

Every time India experienced a sizable portfolio equity outflow, it was followed by sizable inflows. There are already hints that international investors are changing their minds about Indian stocks. Even a slight reduction in the flow of outbound foreign portfolio investments would stop the rupee's decline.

To lessen the volatility of the rupee, the RBI intervenes in the foreign exchange market. The RBI is selling dollars since India's balance of payments has shifted negatively from the second half of 2021. This led to a smaller (6 percent) depreciation of the rupee over the past 12 months compared to far higher (12-18 percent) depreciation of the euro, yen, and pound against the dollar.

The RBI is prepared and dedicated to limiting rupee volatility, according to Hajra, with USD 580 billion in foreign exchange reserves, the fourth highest in the world, and a USD 50 billion long position in the derivatives market.

Due to the RBI's aggressive policies, the rupee has stayed relatively stable over the past 12 months despite significant global volatility. In the upcoming 12 months, the rupee would become more stable due to likely developments in the global economy, he noted.