The rupee on Tuesday closed at a fresh six-month low of 65.45 against the greenback led by a sell-off in the equity markets, a general strengthening of the dollar against most peers and continued dollar demand from importers. This is the lowest closing level since March 23 this year. Interestingly, the rupee closed at the low of the day, which dealers interpreted as a sign there could be a further weakening of the currency. The dollar has gained since the US Federal Open Market Committee meet on September 19 and 20, when the Federal Reserve hinted at a rate hike later this year and also decided to trim its balance sheet starting October. The dollar index has been on a rise over the last two days and was trading at 93.05 on Tuesday.
Following the depreciation, the rupee has now gained just 3.78% while the Chinese renminbi has appreciated 4.7%. The South African rand has gained 2.74% while the Indonesian rupiah’s appreciation is far less at 0.74%. The Russian rouble has risen sharply by 6.66% as has the Malaysian ringgit at 6.65%. Foreign portfolio investors (FPIs) sold $293 million of Indian equities on Tuesday, according to provisional data on the exchanges, taking the sell-off so far this month to $1 billion. “We are seeing the dollar rise against most of its peers and there is a fairly large unhedged exposure which is seeing incremental hedging. As a result, the rupee is taking a hit,” a trader with a foreign bank observed.
Until recently, the rupee had been on an uptrend led by strong fund flows into debt and equity — so much so that the Reserve Bank of India (RBI) shored up its forex reserves to a lifetime high of over $402 billion. Although the weakness in the rupee started after the FOMC meet, it was accentuated on reports that the government might be considering a fiscal stimulus package worth Rs 40,000 crore that the market feared might widen the fiscal deficit. Some of the weakness in the rupee might be countered beginning October with the central bank having opened up FPI investment limits in corporate bonds by separating the masala bond segment from the overall limit. A Bank of America Merrill Lynch report asserts that the RBI is likely to buy up the entire FPI corporate bond inflow as FPI debt investments have risen above 20% of forex reserves. “Our forex strategists see Rs 66.75/$ by December assuming the dollar at 1.15/euro,” the report pointed out.