Rupee Weakens On Inflation Worries, Prospect Of Aggressive Fed Policy

The rupee weakened early on Wednesday as hawkish comments from US Federal Reserve officials bolstered the dollar to a near 2-year high, and worries over surging domestic inflation pushed domestic stocks to extend losses for a second session.

In early trade on Wednesday, the dollar index, which measures the greenback against six peers, gained 0.15 per cent to 99.620, its highest level since May 2020.

The dollar index gained 0.5 per cent on Tuesday after Fed Governor Lael Brainard, generally seen as a more dovish policymaker, said she expects a combination of interest rate increases and a rapid balance sheet runoff to bring US monetary policy to a "more neutral position" later this year, with further tightening to follow as needed.

According to Reuters, that pushed the rupee to weaken to 75.56 against the dollar, and the PTI reported At the interbank foreign exchange, the rupee opened lower at 75.50 against the US dollar, then slipped to 75.58, registering a decline of 29 paise over its previous close. The rupee rose for the third straight session and climbed 24 paise to close at 75.29 against the dollar.

"The rupee is expected to weaken against the US currency tracking the dollar's overnight gains as hawkish comments from Fed policymakers lifted the greenback," Sriram Iyer, Senior Research Analyst at Reliance Securities, told PTI.

Asian and emerging market peers were weaker against the US dollar this Wednesday morning and will weigh on sentiments, Iyer said, adding that investors will await cues from the RBI monetary policy meeting.

While crude markets have witnessed wild gyrations from the Russia-Ukraine war, oil prices have remained above $100 a barrel since Moscow invaded Ukraine on February 24.

As a result, India's oil companies have continued to raise pump prices on the back of elevated global crude prices, sparking inflation worries.

But what is likely to cap the rupee's fall is foreign institutional investors remaining net buyers in the capital market. Indeed, the latest stock exchange data showed that FIIs on Tuesday purchased shares worth Rs 374.89 crore.