'Much of Rupee's weakness linked to strong US dollar index'

NEW DELHI: Much of the weakness in the rupee is on account of a strong US dollar index and not just because of India's domestic economic fundamentals, said SBI Research in its latest report.

The rupee has been steadily and consistently depreciating as it touched yet another lifetime low on Friday morning after the US dollar index strengthened to a two-decade high this week.

The Rupee opened 25 paise lower from the previous session to touch a record low of 81.09 versus the US dollar on Friday, against Thursday's close of 80.86.

Notably, Thursday's depreciation was the biggest single-day fall for the rupee since February 24.

"The Indian rupee (INR) depreciated by a modest 7 per cent vis-a-vis the US dollar since the war broke out. The US dollar Index has appreciated by 15 per cent during the same period," SBI Research said.

There have been instances in the past which showed that rupee depreciation has been much more than the appreciation of the Dollar, which had happened because of weak domestic macroeconomic fundamentals, it added.

The rupee lingered below 80 per dollar in the recent past as RBI seemed to have protected it from crossing the psychological benchmark of 80 per dollar and also keep its volatility under control.

"However, after the recent Fed rate hike by another 75 bps and dot plot indicating the possibility of the terminal rate of around 5 per cent, the rupee has depreciated crossing the 80 per dollar mark," the report said.

On repo rate, the report said it should go up to 5.8- 6.0 per cent if the government targets a fiscal deficit of 4.5 per cent of GDP.

"Another important result of our study is that the key rate of interest set by the RBI is not much affected by the fiscal deficit target. This is because in the case of India the key terminal rate depends more on inflation and the liquidity situation in the country," it added.

A fiscal deficit impacts the rate of interest indirectly by influencing inflation and liquidity dynamics.