EspressoLogy

The rupee has fallen to all-time low levels against the dollar in September 2022 as global economies continue to grapple with high inflation. Year-to-date, the rupee has depreciated about 7.4 percent compared to the dollar index, which has appreciated 14.5 percent over the same period.

Fears of a recession have triggered risk-off sentiment in the market, prompting smart money to move into dollar-denominated asset classes. These assets are considered safe havens during market downturns.

Let's look at some of the reasons behind the rupee's fall:

1. Inflation running loose:

Runaway inflation has been the most significant cause of worry for the global economy this year. Soaring electricity and natural gas prices signal a looming recession in the globe's major economies. In the latest episode, inflation rose to double digits in 19 European Union countries using the euro.

Only a year ago, inflation was as low as 3.4 percent. The flight to safety has caused all major currencies to tank against the dollar. 

2. US Fed's battle against inflation:

In mid-September, US Fed said it would continue fighting inflation with rate hikes and may raise benchmark rates to a peak of 4.6 percent. The announcement caused a significant drop in the already-struggling rupee, as the market expected Fed to cap rates at around 4 percent.

The rupee briefly broke below 82 levels against the greenback to touch all-time low levels. It is currently trading at 81.47. Following suit, the Reserve Bank of India (RBI) on September 30 raised benchmark rates by 50 basis points (bps) to 5.90 percent - its fourth consecutive rate hike. 

As borrowing costs continue to rise, investors are moving out of riskier assets and into the dollar, which is considered a hedge against interest rate hikes and inflation.

3. A silver lining for the rupee

While the rupee has corrected significantly over the past few months, its depreciation is still less than all other currencies because of India's stronger macro-fundamentals, experts opined.

Also Read about RBI launches first pilot of digital rupee.

In his recently concluded RBI Monetary Policy, Governor Shaktikanta Das also echoed this sentiment, saying that the movement of the domestic currency has been "orderly" compared to most other countries. Das also expects inflation to come down close to the target of 4 percent over a two-year cycle and remain sustained.

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