Indian rupee dived to a fresh low against the US dollar on Thursday as investors fled risky assets after the US Federal Reserve gave a more hawkish-than-expected outlook for future interest rate hikes.
The US central bank raised interest rates by 75 basis points on Wednesday for the third straight time and forecast a further 1.25 percentage points of tightening before year-end, in what many saw as a signal that it was willing to tolerate a recession to tame inflation.
“These projections are much more aggressive than what investors had been pricing earlier,” said Ritika Chhabra, Economist and Quant Analyst, Prabhudas Lilladher.
Concerns over the pace and quantum of the Fed’s policy tightening ahead made the rupee close at a record low of 80.86 to the dollar, down from 79.9750 in the previous session. It was the biggest single-day fall for the local unit since February 24, according to Reuters.
Currency analysts believe the rupee could fall even further. "The broad trend looks skewed on the downside but we expect the RBI to intervene to curb the steep fall in the domestic currency," Sugandha Sachdeva, Vice President, Commodity and Currency Research at Religare Broking, told DH.
As investors shunned risky assets such as equities, the NSE Nifty 50 index fell 0.5 per cent to close at 17,629.80, while the BSE Sensex closed 0.57 per cent down at 59,119.72. "The reason behind the market correction was the Fed's commentary stating the worst is yet to come while we have to prepare for it,” said Kush Ghodasara, an independent market expert.
Some others said India could also feel the pain if larger economies went into a recession. "The recession fears in the US, coupled with the EU crisis, are causing jitters in the Indian market. It is a far fetched idea that India will remain totally insulated from the global economic slowdown," said Arun Malhotra, founding partner and portfolio manager at CapGrow Capital Advisors. "The RBI will also follow the US Fed," said Malhotra, adding that the central bank should increase repo rate by 40-50 bps.