Mumbai: The Indian currency sank to a record low against the dollar before staging a marginal recovery on Thursday as global funds sold Indian and other emerging market assets on rising expectations of a US interest rate increase next month.
Stocks fell and a slump in yields reduced the appeal of Indian bonds.
After hitting a record low of 68.86 per dollar in intra-day trading, breaching the 68.85 level it hit at the peak of the so-called taper tantrum in August 2013, the rupee closed at 68.75. It marked a fall of 0.27% from its previous day’s close of 68.57. Year to date, the rupee has fallen 3.8%.
Some analysts expect the local currency to hit a level between 70 and 72 per dollar in the near term in the belief that the Reserve Bank of India (RBI) would want to preserve its foreign exchange reserves.
The rupee’s previous record low came after the US Federal Reserve’s signal that it planned to “taper” quantitative easing spurred an exodus from emerging markets such as India.
Foreign investors have dumped emerging market assets this month as speculation mounts that Donald Trump’s reflationary policies will mean a quicker pace of monetary tightening by the Fed. Concern that he will take a more protectionist approach to trade has also weighed on developing-nation assets.
“The key area of concern for emerging markets has been the protectionist measures and trade negotiations that the US president-elect, Donald Trump, is expected to undertake. Dollar, on the other hand, has strengthened on expectation of an expansionary fiscal policy and thus stronger growth in US,” Edelweiss Securities said in a note to investors on Thursday.
The immediate target for the rupee would be 69 per dollar in the absence of aggressive intervention by RBI, Madan Sabnavis, chief economist at Credit Analysis & Research Ltd, wrote in a note.
The central bank will take appropriate action to deal with the currency’s decline, a government official said on Thursday, asking not to be identified. State-run lenders sold dollars, probably on behalf of the central bank, to stem the fall of the rupee, three Mumbai-based traders said, asking not to be named. RBI has maintained that it doesn’t target a specific rupee level and intervenes only to curb undue volatility in the currency market.
India’s benchmark Sensex shed 0.74% to close at 25,860.17 points on Thursday. Year to date, it has declined 1%.
The benchmark 10-year government bond yield closed at 6.187%, a level last seen on 28 April 2009, compared with Wednesday’s close of 6.28%. Bond yields and prices move in opposite direction.
The dollar index, which measures the US currency’s strength against other major global currencies, was at 101.52, down 0.18% from its previous close of 101.7.
“We are seeing outflows from the equity and debt markets; that is putting pressure on the rupee, along with the dollar strength. I strongly feel they will continue intervening,” said Rohan Lasrado, Mumbai-based head of foreign exchange trading at RBL Bank Ltd.
So far in November, FIIs have sold a combined $3.97 billion in local equity and debt, the steepest selling seen in over three years.
Redemption pressure on foreign currency non-resident (FCNR) deposits may also hurt the rupee. Towards the end of 2013, in a bid to deflect pressure on the rupee, Indian banks raised close to $29 billion in FCNR deposits that are coming up for redemption.
“We believe that the current weakness in rupee will continue over the next few days. The pressure is expected to ease once liquidity in the system normalizes and FNCR redemption pressure eases,” the Edelweiss report said.
Most brokerages have revised their year-end forecast for the currency. BNP Paribas estimates the currency will end the year at 68 per dollar, compared with an earlier forecast of 66.5. Deutsche Bank expects the currency to breach 70 by the year end and 72.5 a year later. HSBC Global Research, in a 16 November note, said it expects the rupee to touch 68 by end-2016 and 69.5 by end-2017.
Other emerging market currencies slumped. The Turkish lira hit a record low, the Philippine peso weakened to a nearly eight-year low, the South African rand was set for its first monthly decline since August and the Chinese yuan was poised for its worst annual drop in a decade.