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Mumbai: Rupee tumbled to a record low on Monday as US President Donald Trump’s tariffs on Canada, Mexico and China, and threats of higher levies on the European Union triggered fears of a broad trade war. Both Canada and Mexico have vowed to hit back with retaliatory tariffs.
Rupee fell to 87.28 per dollar before closing at 87.1850, down by nearly 0.7%, its biggest single-day percentage loss since 13 January.
The fall of the rupee was in line with other global currencies which fell against the greenback. The dollar index, which measures the dollar against a basket of six currencies, opened at 109.29 on Monday, up 0.9 against 108.37 on Friday.
Selloff in equities and foreign outflows also continued to exert downward pressure on the rupee. January saw net outflows of $6.8 billion from both equity and debt markets due to worries over a slowing economy and weak corporate earnings. Global uncertainty is also adding to the reasons why investors are trimming exposure to emerging markets.
Traders say that the Reserve Bank of India (RBI) was intervening in the market through state-run banks, but not in the way it used to a year ago, a sign that it is allowing rupee to move in line with its peers.
“Due to the escalation in the trade war following Trump's imposition of tariffs on China, Canada, and Mexico—along with the threat of additional tariffs on China and the EU—the dollar index has surged to 110. As a result, USDINR closed 58 paise higher at 87.19 after hitting a new all-time high of 87.29. The near-term bias remains upward, with the potential for further trade-driven volatility. The broad range for USDINR on the spot market is expected to be between 86.70 and 87.80,” said Anindya Banerjee, head of research for forex and interest rates, Kotak Mahindra Bank.
Analysts say that rupee depreciation has now re-emerged as a key concern for the Monetary Policy Committee as it meets on Wednesday to decide on the rate action. Despite concerns over the currency, analysts are expecting RBI to deliver a rate cut as the budget has set the stage by keeping fiscal deficit under control.
“We do believe that a repo rate cut is on the cards soon as the budget has done well to spur growth and with expectations of inflation to come down, this could be the right time. But the currency issue has popped up again which can lead to some serious discussion. The liquidity induction measures of RBI did improve the situation,” said Madan Sabnavis, chief economist, Bank of Baroda. “The next few days will be critical as they will tell more on what China is going to do.”
The rupee turned into Asia’s second worst-performing currency this year, after beating most peers last quarter.
It has dropped by nearly 3% since RBI changed its forex management policy under the new governor Sanjay Malhotra. The central bank is willing to allow the local currency move more freely, in tandem with peers in the region.
The interventions in the past few months by the RBI has taken a toll on India's forex reserves, which fell by $70 billion to $634 billion in 14 weeks through 3 January. This has resulted in a liquidity squeeze in the inter-bank money market with deficit touching as high as ₹3 lakh crore. Following requests from market participants, RBI, however, responded with liquidity measures by announcing currency swaps, open market operations and 56-day variable repo rate auction.
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