Rupee dropped 0.60% on Monday, the biggest single-day fall in three months, to hit a two-month low after a host of Asian currencies and the euro fell against the dollar on worries of an earlier-than-expected rate hike by the US Federal Reserve. The Dollex that measures the dollar’s strength against other currencies hit a 11-year high of 97.63 on Friday and remained higher on Monday.
The rate-hike expectation gained momentum after the latest data from the US last week showed that unemployment rate at 5.5% was the lowest since 2008 in the country and 295,000 jobs were added in February. The greenback gained 0.30-0.80% against most Asian currencies and was up 0.14% against the euro. The rupee closed at 62.54/$, down 39 paise or 0.6% from Thursday’s close. Markets were shut on Friday on account of Holi.
“Between June and September, the expectations were moving towards a hike in June by the Fed,” said Anindya Das Gupta, director and head of treasury, Barclays Bank. US Fed chief Janet Yellen had told Congress in February that the Fed could consider increasing rates if the economy improves.
“Monday’s movement should be attributed to the broad dollar strengthen rather than a negative view on the rupee. Given that the dollar has moved so much last week after the jobs data, this adjustment was expected,” said Hitendra Dave, head of global markets at HSBC.
Indeed the rupee, at worst, could slip further to 63.50/$ by end of March, at which level it would have shed a mere 0.7% in the first three months of 2015. Even the end of 2015 forecast of currency market players doesn’t exceed 65/$.
Its BRICS peers, such as Brazilian real, South African Rand and Chinese yuan, have fallen by 13%, 3.8% and 1%, respectively. Most Asian currencies have lost, but those that have risen against the dollar have not gained more than rupee.
“Compared with other currencies, the rupee will perform better but if the dollar strengthens further, rupee would weaken against it,” said Das Gupta.
Ananth Narayan G, regional head of financial markets, South Asia, at Standard Chartered Bank believes any depreciation in rupee would be gentle and slow. “We are expecting robust flows but the RBI would be there to buy dollars. Since the rupee is already overvalued in terms of the real effective exchange rate, a sharp move downward cannot be ruled out, but flows will tend to support,” he said.
An interest rate hike by the Fed would erode the advantage that emerging market economies such as India give in terms of the rate difference and could, thus, prompt foreign investors to avoid investments. So far in 2015, foreign institutional investors have poured in $6 billion into Indian bonds as they offer one of the highest returns among emerging market bonds. FIIs invested $4.7 bilion into Indian shares.