Rupee falls to 2019 lows on Yuan depreciation, selloff

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Published: August 23, 2019 2:56:46 AM

The dollar index was trading at 98.33 on Thursday and had recently hit over 2-year high levels. Most Asian currencies were trading weak against the greenback on Thursday except only the Japanese yen, Indonesian rupiah and the Hong Kong dollar.

Rupee, Rupee fall, Yuan, Dollar, Rupee to dollar, Rupee to yen, market, money market US-China concerns seemed to have amplified after US President Donald Trump said on Wednesday he is the “chosen one” to wage a trade war with China. (Image: Reuters)

The Rupee fell to its lowest level in 2019 on Thursday led by a sudden depreciation in the Chinese yuan that hit fresh 11-year lows as well as a sell-off in the Indian equity markets. The rupee closed Thursday’ session 26 paise down at 71.816 to the dollar after having hit an intraday low of 71.975. Forex dealers said the yuan saw a sudden fall during the day which was replicated by the rupee.

US-China concerns seemed to have amplified after US President Donald Trump said on Wednesday he is the “chosen one” to wage a trade war with China. “Somebody had to do it, so I’m taking on China. I’m taking on China on trade, and you know what? We’re winning,” Trump had stated according to reports. Later on Thursday, Bloomberg quoted Chinese commerce ministry spokesman Gao Feng saying that Beijing will have to retaliate if the US follows through with new tariffs.

As KN Dey, managing partner at United Financial Consultants, pointed out that a considerable quantum of the Indian exports is competing with Chinese exports and any depreciation in the yuan will be unhealthy for Indian exporters unless the rupee too weakens in tandem. “If the yuan falls, and the rupee does not follow, then the export orders move out of India. Obviously, the Chinese are devaluing their currency to adjust for the tariffs which is being imposed by the US, to protect their exporters. It happened in August also 2018 when the tariffs were imposed. The potential of further yuan depreciation still remains high if both the US and China do not come to terms and if that happens the rupee may see further weakness,” he said.

The Chinese yuan closed 0.32% down at 7.08 against the greenback on Thursday. Chinese authorities had allowed the currency to drop below the “7” mark in the beginning of August.

Dealers also pointed out that chief economic advisor K Subramanian’s comments on Thursday did not go well with the markets.

Subramanian had reportedly said that one can’t expect the government to intervene every time some sectors go through sunset. “Not all sectors are doing bad, some are doing well,” the CEA reportedly stated.

Read| Benchmark indices continue to slide as stimulus hopes dim

The domestic equity markets ended weak on Thursday with the Sensex closing 587.44 points down at 36,472.93. Foreign portfolio investors (FPI) sold about $126 million on a net basis during the session, according to provisional figures released by the exchanges. However, since the beginning of July, FPIs have taken out more than $3 billion from the equity markets on a net basis.

Manish Wadhawan, independent fixed income and forex expert points out that an immense dollar strength is putting the rupee under pressure. “The currency is also taking a hit as there is no announcement yet on the stimulus package which was expected by the markets. In addition, comments from a senior government official that potentially ruled out any possible government stimulus did not aid the sentiment in the market,” he said.

The dollar index was trading at 98.33 on Thursday and had recently hit over 2-year high levels. Most Asian currencies were trading weak against the greenback on Thursday except only the Japanese yen, Indonesian rupiah and the Hong Kong dollar.

Ananth Narayan, professor-finance at SPJIMR believes that the rupee still remains overvalued in real effective terms. “Rupee depreciation on Thursday appears to on the back of foreign portfolio outflows in tandem with the sell-off in the equity markets. The global context is also not favourable for the rupee with the dollar strengthening and yuan weakening. rupee remains overvalued in real effective terms, and market participants do seem nervous,” he said.

Some dealers also indicated that the RBI is likely to have intervened in the forex market towards the end of Thursday’s trading session with PSBs selling dollars on behalf of the central bank.

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