Why Is Rupee Falling? Will The Domestic Currency Drop Further?

The Indian rupee plunged to a new all-time low of 78.15 against the US dollar on Monday as it breached the 78-mark against the greenback for the first time ever.
 
In Tuesday's opening trade as well, the rupee remained above 78 against US Dollar for the second day in a row, although it rebounded from its all-time low level, inching up by 2 paise over its previous close. On Monday, the rupee depreciated by 11 paise to close at a fresh lifetime low of 78.04 against the US dollar.
 
Why Is Rupee Down?
 
The elevated global crude oil prices, rise in US inflation, strengthening dollar, rate hike worries, and continuous outflow of foreign funds from the domestic markets, have weighed heavily on the local currency, keeping it under pressure for the last few sessions.
 
Meanwhile, the dollar has gained in view of the noxious mix of slower growth and rising costs. Simultaneously, the benchmark 10-year bond yield jumped to its highest in over three years as investor worries regarding faster rate increases in the US reappeared after US inflation data.
 
More rate hikes by the US Federal Reserve will result in higher outflows on the part of FPIs (Foreign Portfolio Investors) who have already withdrawn over Rs 18,000 crore from the stock markets in June so far. Overseas investors have pulled out Rs 2.40 lakh crore from India since January this year, exerting pressure on the rupee. (Attribute the source of this data NSDL or which agency you have taken it from)
 
Will Rupee Fall Further?
 
The fall in the rupee is expected to make imports costlier and exports profitable. The weaker fundamentals on the domestic front continue to pressurise the local currency with Brent crude looming near $120 per barrel, heightening concerns of the widening trade deficit.
 
Amid a sharp sell-off in the stock market coupled with soaring US treasury yields adding to the weakness in the rupee, experts expect the domestic currency to weaken further ahead of the FOMC (Federal Open Market Committee) meeting on June 15, where the US Fed is widely expected to increase rates by 50 basis points (50 bps) and exhibit a more aggressive tone.
 
Despite this, uncontrolled devaluation might not happen amid the Reserve Bank of India’s (RBI) intervention. How the central bank behaves would be in focus over the next few days.
 
Stock Market Fall
 
Equity benchmarks dipped for the third consecutive day on Tuesday, with the 30-share BSE Sensex plunging 375 points in early trade, trailing weak global markets as investors remained cautious ahead of the US Fed meeting outcome.
 
Unremitting foreign fund outflows continued to weigh on the domestic stock markets. The Sensex was trading 374.72 points lower at 52,471.98 in early trade on Tuesday, while the Nifty declined by 100.15 points to 15,674.25.
 
The Sensex plunged 1,456.74 points or 2.68 per cent to settle at 52,846.70 on Monday. The Nifty plummeted 427.40 points or 2.64 per cent to 15,774.40.
 
Meanwhile, the foreign institutional investors (FIIs) remained net sellers in the capital market, as they sold shares worth Rs 4,164.01 crore on Monday, as per exchange data.