The Indian rupee plunged to an all-time low against the US dollar on Monday, breaching the 78-mark for the first time as the Federal Reserve is expected to go for an aggressive rate hike later this week in the midst of high inflation data.

The Indian currency sank to 78.28 to a dollar in the early part of Monday even as the benchmark 10-year bond yield hit 7.60%, its highest since 28 February 2019. The rupee was at 77.83 on Friday but after trading hours, data released showed that US consumer price inflation soared to a 40-year high of 8.6%. 

The higher-than-expected US inflation triggered a crash in global stock markets and the 10-year US Treasury bond surged 3.19%, 14 basis points up than the previous close. The Fed is certain to tighten policy on Wednesday with a sharp rate hike as a measure to tame inflation, a move which is likely to lead to the flight of global capital from emerging markets such as India.

The rupee is also feeling the heat from India’s high inflation, which stood at 7.04% in May, better than the 7.79% reported in April but still much higher than the Reserve Bank of India’s (RBI) target of 4% with a 2% movement on either side. This is the fifth consecutive month that the rupee breached RBI’s upper tolerance limit. 

The rupee is also impacted by massive FII (foreign institutional investors) sell-offs in the domestic equity markets and a record rise in global crude oil prices. India’s foreign exchange reserves also declined last week, pushing the rupee lower. 

Foreign investors have offloaded Rs 1.8 lakh crore worth of equities so far in 2022 and Rs 14,055 worth of domestic debt. They have, in fact, been net sellers for the eighth consecutive month and have offloaded more than Rs 3.45 lakh crore since October 2021.

Worse, the war in Ukraine is showing no signs of abating. With the war on, food and fuel prices may continue to rise. Covid cases are resurfacing in China, which is going to lead to supply constraints.