The rupee hit record low of 71 level to the dollar for the first time ever today due to strong demand for the greenback from oil importers and surging crude oil prices stoking inflation fears. The currency which closed at fresh lifetime low of 70.74 yesterday fell 26 paise to touch the 71 level to the dollar.
Analysts expect rupee to hit the 72 level per dollar if the current situation persists. The currency opened at a fresh record low of 70.95 per dollar today versus previous close of 70.74.
VK Sharma, head private client group and capital market strategy at HDFC Securities said, "Indian Rupee has depreciated around 11% year-to-date. Higher crude oil prices, demand from defense and oil marketing firms have contributed to the latest bout of weakness. Rupee was overvalued on trade weighted real effective exchange rate. We are not overly concerned about the rupee beyond 72 level. Robust FDI flows in e-commerce companies, healthy forex reserves may limit the downside of the rupee."
The Indian currency is down 3.3% in August and over 10% this year so far-making it the worst-performing currency in Asia. Later, the Indian currency recovered some ground on suspected dollar sales by the RBI and traded at 70.93 per dollar against day's low of 71.
Traders said RBI was likely selling dollar sporadically in small amounts via state-run banks.
Yesterday, the rupee hit a historic intra-day low of 70.90 in early trading - a level that was unthinkable only a few weeks ago.
Meanwhile, the 10-year bond yield also rose dramatically to 7.95 per cent. High Indian bond yields due to worsening inflation outlook also added some amount of pressure.
The forex market became nervous after reports highlighted risks of India breaching the 3.3 per cent fiscal deficit target for 2018/19.
"There is an ongoing trend to buy the dollar on the trade friction theme, which has negatively affected emerging market currencies and in turn fuels the dollar's rise," Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo told Reuters.
"The euro has also taken hits, due to the euro zone's perceived exposure to emerging market economies."
Strong month-end demand for the US currency mainly from oil importers along with currency futures expiry related purchases predominantly weighed heavily on the forex market and haunted investor sentiment.
Crude prices firmed up further on growing evidence of disruptions to supply from Iran and Venezuela and after a fall in US crude inventories.
Benchmark Brent crude oil was trading at $77.71 in early Asian trade compared to yesterday's $77.65 a barrel.
Meanwhile, the Sensex was trading 140 points higher at 38,830 level in opening trade. The Nifty too rose 46 points to 11,722 level.
Written and edited by Aseem Thapliyal