The rupee is in for a rough ride ahead, with the next key psychological level of 80 per dollar almost a done deal after a blowout US inflation print, which will boost the already-rampant dollar further.
"Asian FX vulnerable to sell-off after US inflation surprise," said Robert Carnell, Regional Head of Research for Asia-Pacific, at ING.
That inflation data surging to more than expected 9.1 per cent from a year ago, marking a 40-year peak, will crystalise expectations for a bigger-sized Federal Reserve interest rate hike this month and, in turn, solidify recession risks.
The rupee's journey this year has been nothing short of dramatic, with the currency plunging from changing hands at 74 at the start of 2022 to near 80 against the greenback.
The currency has slumped to a new record low level 26 times since Russia invaded Ukraine late in February, which includes five times the currency breached a new weak level this month, based on Nasdaq data.
That also includes an unprecedented fresh all-time weak close on 20 days.
Just two days ago, the 80 per dollar rate was still a hop, skip and jump away, but now it is almost a done deal, with the pace at which the currency has declined recently.
So far this month, the rupee has hit a new lifetime low level five times.
Indeed, after hitting a series of all-time low rates, the rupee closed out Wednesday at yet another record weak level of 79.81 against the greenback, marking lifetime-low rates for the third straight session and just a whisker away from the 80 per dollar mark.
The collapse of the rupee started days after Russia invaded Ukraine when it hit 77 per dollar for the first time ever in March and has since hurled towards new lows breaching several key psychological threshold levels almost every other day.
This year's global financial market sell-off has been greatly influenced by concerns that increasing rates will limit global economic development. In contrast, the safe-haven dollar has benefited the most in currency markets.
Much of that has been driven by the capital exodus from assets denominated by almost any other currency and into the safe-haven greenback, as evident from the rise in the dollar index, which tracks the currency against a basket of six peers, to its highest in nearly two decades.
The real fear now is that once the rupee breaches the 80-to-a-dollar level, the fall could be even steeper, as a break in a key psychological rate increases bets in favour of a free fall, as witnessed since the rupee weakened beyond the 77 per dollar rate.
From 77 against the dollar to 78 and then to 79 has been swift in foreign exchange terms, with the currency collapsing fast towards the 80 per greenback mark.
That is something none expected, even in their wildest predictions at the start of 2022, when the Indian currency was trading around 74 against the greenback.
Keeping in mind the limitations, the risk to currency stability remains high, paramount when fighting surging inflation and higher commodity prices; the outlook looks bleak.
Add to the mix are fears of a global recession driven by inflation-fighting central banks.
"The rupee is expected to trade on a negative note taking cues from the strong US dollar. The dollar strengthened on hawkish Fed and optimistic statements by Fed officials assuaging fears over economic fallout of rate hike," said Anuj Choudhary, Research Analyst at Sharekhan by BNP Paribas.
The rupee has been battered by widening trade and current account deficits and driven by a global stampede into safe-haven US dollars on rising global recession risks.
Surging commodity prices have not helped the Indian currency, especially crude oil, as the country imports more than 80 per cent of its needs, and the war on the edge of Europe does not seem to diminish anytime soon; if anything seems to be escalating further.
Not just emerging market currencies, but the rout against the dollar has been broad-based; almost every other currency has fallen to multi-year lows, underscoring increasing global recession fears.
On Wednesday, the euro breached parity with the dollar for the first time in 20 years on expected interest rate differential with the US driving that collapse.
Bloomberg reported that the euro slipped as much as 0.4 per cent to touch a low of $0.9998, below $1 for the first time in more than two decades, suffering a swift and brutal slump this year.
With Europe at the epicentre of the fallout from the Russia-Ukraine war, the risks to the economies there have risen, and the cut in Russian gas supplies heightened fears of a recession in the eurozone.
Add in central banks moving at vastly different speeds and an in-demand dollar, and some analysts say parity may not be the endpoint but merely a stepping stone to further weakness.
The euro's descent this year is just one side of a global story of dollar dominance.
Markets have been held up a bit in terms of parity in euro-dollar but we still have an incredible number of moving parts," Societe Generale's Kit Juckes, told Reuters, explaining that the higher the U.S. inflation numbers, the clearer it will be that the Fed will crack on with rate hikes.
This year, the greenback has been in favour as a haven investment, helped by higher US interest rates and a safety bet against a global recession.
On the rupee, the Reserve Bank of India and the government have intervened but have been unable to stem the sharp decline.
The government has levied a tax on gold imports to help the battered rupee. The RBI has intervened in the spot and futures forex markets by selling dollars, introduced measures to boost forex inflows directly and announced a rupee settlement system for international trade settlements.
Still, the RBI has repeatedly said it would intervene only to control "jerky movements" of the rupee and not try and fight a broad global trend, which is the case currently.
While there's been speculation that the dollar rally could spur global policymakers to intervene to weaken it at some point, there is only so much a central bank or its policies can control in the currency environment.
The rupee's, and almost every other currencies', fate hangs in the hands of the Fed and the dollar.
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