The Indian rupee tumbled to its lowest against the US dollar amid a record trade deficit, rising concerns of high oil prices and heavy foreign fund outflows.

The rupee ended Tuesday at 79.37 against the American currency, down 41 paise over its previous close.

Currency experts predict a further fall for the rupee as it nears touching 80 to a dollar. Several factors are putting pressure on the Indian currency, including a record external debt which comes up for repayment. Around $267 billion of India's total external debt of $621 billion is due for repayment in the next nine months.

Record high trade deficits will be the norm now and the rupee is likely to fall to 82 against the dollar in the third quarter of 2022, analysts at Nomura said.

India's merchandise trade deficit ballooned to a record $25.63 billion in June 2022, 62% higher than the year-ago period, according to official data released on 4 July. This was on the back of a steep rise in gold and crude oil imports. From April to June 2022, the trade deficit stands at $70.25 billion. In May 2022, the trade deficit was at $24.3 billion.

Widening current account deficit (CAD) is going to remain a drag for the rupee, which will be worsened by the FPI outflows–$28.9 billion year-to-date net foreign outflows–and the currency will fall to 82 against the US dollar in the third quarter of 2022 and then rise to 81 in the fourth quarter. There will only be “limited offset” from India’s FDI and OI inflows, analysts at Nomura noted.

The Federal Reserve’s aggressive tightening, which will lead to a stronger dollar, can cause a recession in the US by the fourth quarter of 2022, according to Nomura.

“Such an environment is not conducive for EM/Asia FX that are dependent on healthy global growth and equity-related inflows, including INR,” the analysts wrote.

“We are also somewhat concerned about the RBI’s apparently ambivalent commitment to its 4% inflation target, which could further discourage FPI into the local bond market (year-to-date net foreign outflows of $2 bn),” they said.

What could slow down the rupee depreciation is RBI’s dollar selling intervention, they added.

India's foreign exchange reserves, which had touched a peak of $642.5 billion on 3 September 2021, has fallen to $593.3 billion as of 24 June. This is still high enough for the RBI to support the sliding rupee, but external factors will continue to drag it down.

“A double whammy of weak equities and strong US Dollar Index caused rupee to depreciate against the US dollar. Low forward premium and offshore derivatives quoting a premium over onshore are signs of unwinding of carry trade which is a major headwind for the rupee. Over the near term, we expect USDINR to trade with an upward bias, within a range of 79.00-79.80 on spot,” said Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities.