The Indian rupee tumbled 1.30% to a fresh two-year low on Monday following a massive fall in share indices on fears that China’s yuan devaluation and the US Federal Reserve’s imminent rate hike could cripple global economic growth and hurt emerging markets such as India. Dollar selling by public sector banks at the behest of the Reserve Bank of India’s intervention around 66.50/$ level and governor Raghuram Rajan’s comments slowed the currency’s fall during the session.
Notwithstanding the intervention, the rupee settled at 66.70/$, its lowest close since September 2013 as PSU banks were also seen buying dollars.
Resilient so far, the currency has shed 3.75% ever since China devalued yuan on August 11. The rupee’s fall was triggered in early trade by a massive fall in most Asian currencies with some of them hitting multi-year lows—Malaysian ringitt fell to a 17-year low. With domestic share indices falling by a whopping 1000 points, most foreign banks began building long dollar positions anticipating outflows and the currency slipped past the psychological 66/$ level to hit a new two-year low of 66.50/$.
The fall triggered forward dollar purchases by importers but the rise in forward premiums was limited possibly due to intervention by the RBI.
Currency dealers said that PSU banks stepped in to sell dollars around 66.50/$ but this was not strong. However, the RBI governor’s comments that the central bank would not hesitate to use forex reserves to curb the currency’s volatility helped slow the rupee’s fall. Currency market participants fear that the rupee could revisit its all-time low of 68.85/$ hit in August 2013 if the pressures persist.
“Öur fundamentals are strong. But given that much of this is triggered by external factors, we cannot rule out further weakening,” said Ananth Narayan G, regional head of financial markets for South Asia at Standard Chartered Bank.
“We have about $355 billion in reserves plus another $25 billion as forward contracts, so in sum we have $380 billion. We will have no hesitation in using reserves,” said Rajan while speaking at the FICCI-IBA hosted banking event. “We try and prevent undue volatility and I want to repeat that again that if we see undue volatility, we have the resources to deal with that,” he added.
Rajan also alluded to the rupee’s overvaluation in terms of real effective exchange rate and said that markets should not focus on the rupee’s movement against the dollar alone.