Indian stocks slump on global monetary policy tightening; Rupee at new low

Indian stocks extended their losses from the previous session and declined further on Friday morning following the latest policy rates hike by the US Federal Reserve in its fight against high inflation.At 10.05 am, Sensex and Nifty traded in the 0.8-0.9 per cent range. Further tightening of monetary policy in the US essentially means that investors will have a tendency to move to the US markets for better and stable returns.

Meanwhile, the Rupee tasted yet another lifetime low on Friday morning after the US dollar index strengthened to a two-decade high this week, on hopes that demand for safe-haven currency such as the dollar would pick up.This morning, the Rupee opened 25 paise lower to touch a record low of 81.09 versus the US dollar, against Thursday’s close of 80.86. Yesterday’s depreciation was the biggest single-day fall for the rupee since February 24.

The US Federal Reserve had raised the repo rate by 75 basis points — which is the third consecutive hike of the same magnitude, in line with expectations. The Fed also hinted that more rate hikes were coming and that these rates would stay elevated until 2024.The US central bank seeks to achieve maximum employment and inflation at the rate of 2 percent over the long run and it anticipates that the ongoing hikes in the target range will be appropriate.

Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.Consumer inflation in the US though declined marginally in August to 8.3 per cent from 8.5 percent in July but is way above the 2 percent goal.

India’s forex reserves are at two-year low. The reserves have dropped by almost USD 80 billion since the escalation of the Russia-Ukraine tensions into war earlier this yearIndia’s forex reserves have been consistently dropping for the past few month, on account of RBI’s likely intervention in the market to defend the depreciating rupee.

Typically, the RBI intervenes in the market through liquidity management, including through the selling of dollars, with a view to preventing a steep depreciation in the rupee.A depreciation in the rupee typically makes imported items costlier. “The Dollar Index may continue with its positive bias as the US Fed decided to raise interest rate by 75 bps, for a third consecutive month and signalled that it would continue to lift rates this year at a most rapid pace to combat inflation, which is running hot,” said ICICI Securities.

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