RBI defends the rupee at less than 80 to the dollar but faces a sharp decline

Early on Monday, the rupee was unchanged and trading below 80 to the dollar, with strong support from the Reserve Bank of India’s intervention.

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Even though the dollar started the week on a strong footing ahead of the Federal Reserve meeting, the rupee was flat early on Monday and trading under 80 to the dollar, strongly supported thus far by Reserve Bank of India intervention.

According to Bloomberg, the rupee yesterday closed at 79.8587 against the dollar after initially trading at 79.8400. This is down from its previous closing of 79.8537. 79.8350 to 79.8625 were the trading ranges for the rupee, according to the news agency.

The rupee increased five paise to 79.85 against the US dollar in early trade, according to PTI.

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However, a different analysis revealed that the rupee faces a near-term risk of additional depreciation to 82 to the dollar due to the increasing trade deficit and the US Federal Reserve’s anticipated aggressive rate hike later this week to rein in record-high inflation, according to economists.

The RBI has stated, however, that they will protect the Indian rupee from severe volatility and restrict any abrupt fluctuations.

The rupee has held up well, according to the central bank, but they were prepared to use $100 billion in reserves if necessary to protect the currency in these exceptional circumstances, when nearly every currency listed on the opposite side of the exchange rate against the dollar has suffered losses.

As traders prepare for this week’s dramatic increase in US interest rates and seek protection due to evidence of a slowing global economy, the dollar was holding steady.

Early in the Asia session, the dollar was somewhat stronger than most other major currencies, trading at $1.0195 on the euro and recouping Friday losses to buy 136.57 Japanese yen.

On Wednesday, the US Federal Reserve will wrap up a two-day meeting, and the markets are pricing in a rate increase of 75 basis points (bp), with a 9% probability of a rate increase of 100 bp.

“Market reaction will turn on how hawkish Chair (Jerome) Powell sounds with his determination to reduce inflation in the face of slowing growth,” National Australia Bank currency strategist Rodrigo Catril, told Reuters.

As investors’ appetite for risk decreased due to concerns about a worldwide economic slowdown, Asian equities lost ground and fell from nearly three-week highs.

Following similar hints, Indian equity indices on Monday opened lower, ending a run of six straight gaining days.

Contrarily, crude oil prices decreased, continuing a recent downward trend, due to worries that the world’s largest oil consumer, the US, may experience a slowdown in the growth of fuel demand due to an anticipated increase in interest rates.