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MUMBAI/ DELHI : The rupee plunged to 77.46 against the dollar on Monday after hitting a record low of 77.52 in intraday trading, as foreign investors continued to pull money from Indian assets as the dollar strengthened after the US Federal Reserve raised interest rates.

Analysts said the slide of the Indian currency should not be seen in isolation as the Chinese yuan and the Japanese yen, along with other major currencies, have all weakened against the dollar. However, India is more vulnerable than other nations as it relies on imports to meet about 85% of its oil requirements, a situation worsened by soaring crude oil prices.

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Market mechanics

“When Asian currencies move, especially the Chinese yuan, the Indian rupee moves in tandem," said Sajal Gupta, senior vice-president and head of forex and rates, Edelweiss Securities.

In the last few days, US bond yields have touched the highs of 2018, and the dollar index has reached a 20-year high following robust US jobs data for April, fuelling expectations of further rate hikes by the Fed.

Most experts now expect the rupee to trade in the range of 78-79 against the dollar in the coming months. While some analysts believe that the Reserve Bank of India (RBI) may intervene to arrest volatility, others said it might not do it as frequently as before.

“For the week ahead, the rupee needs to reclaim levels of 77.10 to see a recovery towards 76.80/76.70 again. The bias will stay negative until then, and the currency will see further depreciation towards 77.80 levels," analysts at Emkay Global Financial Services said.

“RBI has long positions in the forwards alongside reserves, and most importantly, it has signalled that rupee liquidity is ample. This means even if they sell dollars in the spot market and mop up rupee liquidity, it will be in line with their policy," said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities.

RBI’s forex reserves fell below $600 billion in the week ended 29 April, showed central bank data.

According to Kunal Sodhani, assistant vice-president (global trading centre) at Shinhan Bank India, there were several attempts of intervention to keep the rupee below 77 amid extreme volatility in the past. The central bank’s forex reserves, Sodhani said, have witnessed a fall of almost $44 billion since the start of this year.

Meanwhile, Indian equities continued to face headwinds on Monday. The Nifty and the Sensex closed 0.67% lower each. The pressure on the broader markets was also intense. The S&P BSE mid-cap index and S&P large-small index were down 1.89% and 1.67%, while the S&P BSE large-cap index was down 0.88%. The broader markets are expected to continue to remain under pressure. Overall, the risk-off sentiment in the equities market is being led by rising crude prices, continued selling by foreign portfolio investors, interest rate hikes in major economies, and now the record lows of the rupee.

“We expect this trend to continue, with large-caps expected to outperform mid-caps and small-caps," said Bharat Arora, an analyst at Ambit Capital. Others noted that the hawkish stance of the US Fed, rate hikes by RBI, Bank of England and the Australian central bank dented investors’ risk appetite.

“We don’t know how long this correction will last. The Nifty corrected by 3.9% last week, but investors should not commit the mistake of aggressively buying on this dip, assuming that prices have corrected a lot," said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.

Most global stocks also declined on Monday. Other Asian indices such as Taiwan TAIEX, Nikkei, Jakarta Composite and Hang Seng fell 2.19-4.42% on Monday, with only the Shanghai Composite Index gaining 0.09%.

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