Indian rupee hits record low amid concerns over ‘sustained inflation’

The Indian rupee hit record lows against the US currency on Tuesday after higher oil prices raised concerns of sustained inflation, although intermittent dollar selling by the central bank helped limit losses.

The partially convertible rupee was trading at 78.75/76 per dollar by 0745 GMT, compared to its close of 78.34 on Monday. The unit touched an all-time low of 78.7750 just earlier in the session.

India imports more than two-thirds of its oil requirements, and higher crude prices add to the country's trade and current account deficits (CAD) and hurt the rupee by pushing up imported inflation.

Also read: Indian rupee hits record low on rate hike worries

"With crude rising yet again, we could see rupee head towards 79-79.50 levels in the next week or so depending on what the central bank does," a senior trader at a private bank said.

Oil prices rallied for a third day as major producers Saudi Arabia and the United Arab Emirates looked unlikely to be able to boost output significantly, while political unrest in Libya and Ecuador added to supply concerns.

Dealers said the Reserve Bank of India has been intermittently selling dollars via state-run banks to prevent runaway losses in the rupee, but dollar demand in the system was far stronger.

Global dollar funding stress is evident through the widening LIBOR-OIS spread, and in the domestic market, RBI's heavy forwards market intervention has compounded the problem of cash dollar shortage, analysts said.

Also read: Indian government trims tax on fuel to fight inflation

The RBI has been selling forward dollars to avoid infusing rupee liquidity in the system and that has led to the one-year onshore forward dollar premiums collapsing to below 3%.

"Dislocation in forward rates, falling FX cover, persistently high commodity prices, limited exchange rate pass-through to inflation and elevated INR valuations may call for the RBI to re-orient its FX intervention strategy," said Madhavi Arora, an economist at Emkay Global.

"Allowing INR to gently weaken over time is the right strategy, giving CAD space to improve," she added.

Jigar Trivedi, a research analyst at Anand Rathi Shares and Stock Brokers, said he expects the rupee to depreciate towards 80-81 per dollar levels by the year-end weighed down by the twin deficits and rising interest rate differentials.