The currency markets had been hoping the RBI would defend the currency with an interest rate hike in its monetary policy announcement last week.
The rupee on Monday crashed to new lows hitting 74.0998 against the greenback in intra-day trade before staging a mild recovery to close at an all-time low of 74.0713. The currency market has been facing added pressure after being disappointed with the monetary policy committee’s (MPC) decision to keep the repo rate unchanged at 6.5%.
The currency markets had been hoping the RBI would defend the currency with an interest rate hike in its monetary policy announcement last week. With importers rushing for dollar cover, the premium on three-month forward contracts jumped slightly by one basis point (bps) over Friday’s close to around 4.55% on Monday.
With currency weakness likely to persist, a money market expert observed, “selling in equity markets will continue; where foreign investors would choose to exit and, perhaps, re-enter at a later stage.”
Manish Wadhawan, MD and head of fixed income, HSBC India, had earlier told FE that India may need durable long term funds and NRI bonds seem to fit well in this situation. “The possibility of issuance of NRI bonds is not ruled out primarily because our current account deficit (CAD) as we face a mismatch due to the foreign institutional investors (FII) flows,” he said.
“It’s a tough external environment for emerging markets, with India being no exception. The global factors have fuelled the decline in our currency, as we enter the quarter (October-December),” Wadhawan explained.
A money market expert observed, “There has been some respite from crude, as Brent has cooled down to $82.89 odd levels from the four year’s high of $86.74. However, impact of falling crude was not seen on the rupee mainly due to strong dollar index and high US bond yield”.
Experts at Care Ratings commented that US sanctions on Iran are set to take effect on November 4, which will further lead to increase in oil prices and inflationary concerns in the economy that could wield downward pressure on the rupee. If the US defers its decision to impose sanctions, it might give some respite to the falling currency only after November.
On Monday, the dollex had risen to levels of 96.98 levels before softening somewhat. Nonetheless, the dollex was stronger than the 95.62 levels on Friday; in early August the dollex was ruling at around 94.66. The dollar has been strengthening given the US Fed has been raising interest rates and has declared its intention to raise them further.