The rupee fell on Wednesday as the Federal Reserve’s surprise interest rate cut on Tuesday stoked concerns that policymakers saw a bigger risk of a recession in the world’s largest economy.
The Indian currency declined to its weakest in more than a month on speculation that investors may pare emerging market assets as global growth slows. The Fed lowered its benchmark rate by three -quarters of a percentage point to 3.5%, citing “increasing downside risks to growth”.
“There’s a sense of trepidation out there,” said Claudio Piron, Singapore-based head of Asian currency research at JPMorgan Chase and Co. “The Fed’s move is unprecedented and the level of uncertainty is high across markets. We can expect increased volatility in the rupee and fund flows.”
The rupee fell 0.3% to 39.58 per dollar in Mumbai. That is the lowest closing level since 19 December. It traded as low as 39.78 on Tuesday, the lowest in almost two months, as data from the capital markets regulator showed funds based abroad reduced holdings of local equities.
Funds based abroad sold shares worth $2.04 billion (Rs8,078.4 crore) between 16-19 January—the most in a four-day period since at least October 1999, the Securities and Exchange Board of India said. In 2007, the rupee rose 12.3%—the most since at least 1974, as overseas funds bought a record $17.2 billion in equities. “Portfolio inflows may not surge after yesterday’s US rate cut the way they did following the Fed cut in September,” said Manoj Rane, treasurer at the Mumbai unit of BNP Paribas SA. “Foreign institutional investors will remain cautious due to concerns about the global economy and we are unlikely to see big gains in the rupee.” Overseas funds bought more than $8 billion in Indian equities in the one month after the Fed cut its rate for the first time since 2003 on 18 September, pushing the rupee above the 40 level for the first time since 1998.
Merrill Lynch and Co. cut by half its forecast for US economic growth.
The American economy will expand 0.8% this year—down from an earlier forecast of 1.6%, the New York-based bank said.