Higher interest rates in advanced economies typically result in capital outflows from riskier emerging market economies like India. The rupee fell against the US dollar as major central banks around the world raised interest rates quickly, rising dollar index and dampening the outlook for emerging market assets and wreaking havoc on domestic equity and bond markets.
The Bank of England became the latest central bank to raise interest rates in order to combat high inflation on Thursday, raising the country’s policy rate by 25 basis points to 1%.
The move came just hours after the US Federal Reserve raised its benchmark policy rate by 50 basis points in response to the world’s largest economy’s runaway inflation, resulting in higher dollar index.
The partially convertible rupee opened at 76.54 to the dollar, up from 76.26 to the dollar at the previous close. So far in the day, the Indian currency, which was last at 76.71/$1, has moved in a range of 76.51-76.80/$1.
The 10-year benchmark government bond yield in India was last trading 4 basis points higher at 7.44 percent. When bond yields rise, bond prices fall.
The US dollar index, which compares the US currency to six major rival currencies, was last at 103.67, down from 103.58 at the previous close.
The recent hawkish turn by major central banks has exacerbated the selling pressure seen in Indian equities by foreign investors over the last eight months.
According to NSDL data, foreign institutional investors have net sold a whopping Rs 1.3 lakh crores worth of Indian stocks so far in 2022. According to the data, foreign players have reduced their exposure to domestic debt by Rs 9,155 crore.
At 10:30 a.m., the BSE Sensex and Nifty50 were both trading 1.7% lower.
Despite the Reserve Bank of India’s surprise rate hike on Wednesday, and with US interest rates expected to rise significantly from current levels, analysts are pessimistic about the rupee’s prospects.
“After a period of weakness in safer DM, dark clouds are gathering over riskier EM FX.” Oil prices are back above $110 as Europe prepares for an oil embargo against Russia.
Fundamentally, the domestic trade deficit has widened to more than $20 billion, and inflation is expected to rise to around 8% in April, according to CR Forex Advisors MD Amit Pabari.
“To summarise, once FDI flows exit the market and the RBI permits a depreciating move, we could see the USDINR pair heading higher towards 77 and 77.50 levels in the short term.”
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