The rupee on Monday tumbled against the dollar, ending the session at 69.9287, an all-time low. The immediate reason for the sharp fall in the currency was the strengthening dollar — the Dollex at one point during the day was trading at 96.522, a level not seen in the past one year.
Moreover, the fall in some emerging market currencies such as the Turkish lira, which has so far lost a whopping 45% since January, also appears to have affected the sentiment. There was no confirmation on whether the Reserve Bank of India (RBI) intervened in the markets on Monday.
Jayesh Mehta, managing director and treasurer, Bank of America, said the rupee’s movement had been sharp because it had reacted to the moves in the dollar and the lira. “Since it was the first day and the market was positioned neutrally to the rupee last month, the move was dramatic. However, we expect the currency should settle down,” Mehta observed. He pointed out that India’s economy was in far better shape than those of most emerging markets.
Neelkanth Mishra of Credit Suisse said he did not expect any meaningful rupee-specific weakness, saying the Indian currency was merely tracking the dollar index. “The withdrawal of unprecedented levels of monetary accommodation is expected to cause outflows of capital from emerging markets,” Mishra noted, adding that the impact of a reversal of the flows to the EMs over the past decade would be felt the least in India after China.
While the rupee has lost 8.7% in 2018 so far, the Chinese renminbi has depreciated by 5.5%. The movement in the currency came as a surprise since foreign flows till August 10 have been positive with foreign portfolio investors (FPIs) buying close to $900 million worth of debt and$ 407 million worth of equities.
MV Srinivasan, vice-president, Mecklai Financial Services, pointed out that while one section of the market expected the rupee to hit 70 against the dollar, some believed the RBI would step in with a dollar bond issuance.
“The fear of this contagion moving from Turkey to Europe is also live at the moment,” Srinivasan said.
Ananth Narayan, professor, finance, SPJIMR, said that while India did have its vulnerabilities — an unhealthy external balance, a tricky fiscal deficit and banking stress — it was not Turkey. “Just as the INR (Indian rupee) markets appeared to be settling down on the back of strong RBI intervention the past few days, the fall in Turkish Lira and South African Rand triggered a sharp sell-off. Reversing a recent trend, FPIs may have bought USD (US dollars) today to hedge their India positions,” Narayan explained.
