Fed move fear triggers panic selling

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SummaryRupee saw the biggest single-day fall in nearly two decades to a fresh all-time low of 63.23

Rupee saw the biggest single-day fall in nearly two decades to a fresh all-time low of 63.23 on escalating worries that dollar outflows would increase once the US Federal Reserve begins to pare quantitative easing programme perhaps as early as September.

The currency hit a low of 63.23/$ before closing at a record low of 63.13 and is down 15% since January. Thin volume exacerbated the fall of the rupee, delears said.

“There is no supply of dollars from anywhere, exporters or FIIs and with thin volume, the fall intensified,” said the head of forex trading at a public sector bank.

The currency has been touching new lows despite a series of measures taken by RBI and the government to curb its fall since July.

Market participants say these measures have not reduced the bearish outlook of the rupee as the fundamental problems of the widening CAD has not been addressed.

“For last two years, we have been talking about what measures we can take tomorrow. But the market will get some confidence if CAD and infrastructure problems are addressed which are not short-term,” said Ananth Narayan G, co-head of wholesale banking and head of global markets at Standard Chartered Bank. The rupee reacted by falling to a fresh low on fears such capital controls may stretch to foreign investors eventually. The government, however, denied any capital control measures are being contemplated.

In July, RBI had clamped down on domestic liquidity by capping bank borrowings from the daily repo tender at R75,000 crore and later brought it down further to 0.5% of deposits. The Marginal Standing Facility rate was raised to 10.25%.

The sharp fall of the currency on Monday has once again triggered fears of a rating downgrade as currency depreciation could hit companies and thereby the growth of the economy.

“There is a sense of a spiral. If the rupee continues to depreciate, it can start to impact the fundamentals of the country as well,” said Ananth Narayan.

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