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Why Is Dollar Rising Against Rupee

Why Is Dollar Rising Against Rupee

The Indian rupee fell to a historic low of 82.57 against the US dollar today, as rising oil costs and a strong dollar index weighed on mood. Traders will now carefully watch today’s US payrolls report for a new indicator of the country’s inflationary pressures. The dollar index, which measures the value of the US currency against a basket of six major currencies, barely changed at 112.032 after rallying from a two-week low.

The World Bank cut India’s GDP prediction for this fiscal year by a percentage point on Thursday, citing rising commodity costs.

The closing session of the current week began on a sour note. By 9:00 PM IST, the Indian rupee has dropped to a record low of 82.60 versus the US dollar, which is clearly not a positive omen for the Indian markets. Interestingly, the rebound in the Dollar Index in the last two sessions has not even been half of the decline from the two-decade high of 114.7, but the rupee’s depreciation has driven it to an all-time low. If the Dollar Index breaks through its all-time high, USD/INR might shortly reach a new high of about 83.

The broader markets are also feeling the effects of a weaker currency. The Nifty 50 index is trading near the day’s low, falling 0.09% to 17,216. Every sectoral index has dropped into the red zone, particularly the Nifty Metal index, which is down more than 0.4% to 5,864. Metals weakness is directly proportional to dollar index strength.

3 Factors Causing the Fall!

  1. One of the primary factors is the dollar index’s comeback. A rising dollar index simply suggests that demand for the US dollar is rising relative to the supply of other currencies (mainly the 6 currencies that make up the dollar index). The weakness of other emerging market currencies, on the other hand, is connected to a rising dollar index.
  2. The unexpected surge in crude oil prices is the second important cause. Brent oil, which fell to approximately US$82.5 per barrel on September 26, 2022, due to mounting worries of a global recession, is currently trading at around US$94.5 per barrel after OPEC+ agreed to reduce 2 million barrels per day of oil production. That’s a substantial 14% increase in less than two weeks. India is a net crude oil importer, importing over 80% of its crude oil consumption. When oil prices rise, it puts further pressure on the rupee, as is currently the case.
  3. The third factor is the World Bank’s downgrading of Indian GDP from 7.5% to 6.5% for the current fiscal year. A 1% reduction in GDP prediction is a significant reduction, which is surprising given the durability of the Indian economy in comparison to other wealthy nations. The rupee has also suffered as a result of this.

The rupee is currently down about 11% in 2022, on track for its worst annual performance since 2013.

Asian currencies were under pressure on Friday after Fed officials stated that they will not slow the pace of rate hikes in their fight against inflation, as they have in the past.

The advantages of trading the USD-INR pair in the currency derivatives market

Up to a certain extent, any resident Indian or NRI can engage in the USD-INR pair even if there is no underlying. In contrast, in the future market, you can only hedge underlying currency exposure.

The bid-ask spreads in the near-month pair are as low as 0.0025, which significantly decreases the liquidity risk when trading. Furthermore, the USD-INR is a fairly liquid pair, with quotes available in both directions with little risk.

The USD-INR pair is based on the transparent market mechanism, as opposed to the forward market mechanism, which is a closed market. This makes it far more appealing to individual traders who have limited access to information and insights. In reality, much like your standard stock / F&O trading screen, you may go into your trading terminal and see the 5 best buy and sell bids with volumes, which significantly decreases information asymmetry.

You can access the USD-INR pair through your broker or directly from your internet trading platform, which increases convenience and lowers trading difficulties.


Disclaimer

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The thoughts stated in the Blog are meant to give general information only and are not intended to provide specific advice or recommendations for any individual or on any specific asset or investment product. Its sole purpose is to educate people about the financial industry. The commentary’s points of view are subject to change at any time without notice.

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