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How Fed rate hike triggers rupee fall

How Fed rate hike triggers rupee fall

How Fed rate hike triggers rupee fall
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By Asmita Pant  Sept 26, 2022 9:56:06 PM IST (Published)

The domestic currency fell to a record low of 81.54 against the dollar on Monday. The dollar index – which has an inversely proportional relation with rupee – surged to two decades high of 114.4.

The rupee has plunged to a series of lifetime lows against the US dollar since the US Federal Reserve raised its key interest rate by 75 basis point for the third straight time on September 21 and signalled at further rate hikes in future.

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The domestic currency fell to a record low of 81.54 against the dollar on Monday. The dollar index — which has an inversely proportional relation with rupee — surged to a two-decade-high of 114.4. “We think dollar index can certainly try to test above 115,” Vishnu Varathan ED-Head, Economics & Strategy Asia & Oceania Treasury, Mizuho Bank said to CNBC-TV18.
The increase in interest rates in the US could also cause global funds to pull money out of Indian government securities. To prevent FPI outflows from the Indian bond market, the Indian central bank may raise interest rates.
With the rate hikes in the dollar, FPIs might pull money out of the equity and bond markets, causing the rupee to weaken.
“All news is not bad, I mean, even if you look in the currency, obviously, RBI’s engagement has made that the rupee is probably staged stronger than a lot of other emerging market currency. But at the same time, oil is not particularly badly behaved right now, equity flows have returned, there is prospect of index inclusion for Indian bonds. So there are more mixed news even on the currency front,” said Sameer Goel, Head-Emerging Markets & APAC Research, Deutsche Bank.
Amid the Russia-Ukraine war and the Fed rate hike of 75 bps for the third time in a row, "slowing portfolio flows in the domestic markets have further accentuated the decline witnessed in the rupee-dollar exchange rate, even as weakening crude oil prices are still capping losses in the domestic currency," said Sugandha Sachdeva, Vice President - Commodity and Currency Research, Religare Broking Ltd.
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