The Indian rupee fell for the third straight day and breached the key psychological 65/$ mark as bearish bets on the currency continued to pile up after the devaluation of the Chinese yuan earlier this week.
The rupee, which settled at a fresh two-year low of 65.10/$, has lost 1.38% over the last three days in the wake of the yuan depreciation. The yuan has depreciated more than 2% over the last three days with the Peoples Bank of China devaluing the currency twice in two days through a change in the methodology of setting the currency’s daily reference rate.
The fall dragged down most emerging market currencies including majors such as the euro.
The rupee’s fall was also accentuated on bets that the RBI would cut policy rates ahead of the scheduled September 29 meeting on the back a sharp fall in retail inflation.
Data on Wednesday showed that In July consumer price index inflation fell to 3.78%, from 5.40% a month ago.
Policy rate reductions render local assets less appealing to foreign investors as returns reduce and thereby could slow down dollar inflows.
Having been resilient to external shocks such as the global bond sell-off in June and the worsening of the Greece crisis, the Indian currency was one of the most hit by the Chinese devaluation. Given that the rupee is overvalued by 12% in real terms as per a 36-currency basket tracked by the RBI, concerns rose that the yuan’s sharp devaluation would render Indian exports uncompetitive.
Both policymakers and bankers have voiced concerns over this sharp movement. “China is doing is very dangerous and unpredictable. Devaluing the yuan twice in two days will lead to competitive devaluation, unless something is done to prevent it,” said Aditya Puri, managing director of HDFC Bank.
Also, India’s trade deficit with China has jumped by 34% in 2014-15 and its exports are already shrinking for seven consecutive months. A yuan devaluation could make the fall in exports more severe. Arundhati Bhattacharya, chairman of the country’s largest lender State Bank of India, had said on Wednesday that the Chinese devaluation poses a big challenge. “Yuan devaluation is a challenge obviously because it makes our exporters a little uncompetitive,” she said.
According to currency dealers, public sector banks were seen selling dollars on Thursday as well, said to be at the behest of the Reserve Bank of India.
“There have been some intervention in the market again to curb the fall of the rupee around 65/$ levels,” said a senior forex trader at a public sector bank. Further, market participants expect the currency to stabilise going forward given that even the fall of the yuan has slowed down after the Chinese central bank stepped up its intervention in the market and also released a statement saying that there is no basis for the yuan depreciation to persist.