With the Dollex climbing to an 11-year high of 97.3 on Friday in anticipation of a sooner-than-expected interest rate hike in the US, the rupee tanked on Monday, losing 0.6% to hit a two-month low of 62.54 against the greenback. The fall in the Indian currency was in sync with the drop in other Asian currencies and the euro. Stocks sank across Asia as investors feared a stronger dollar might result in money moving out of emerging markets. The Sensex gave up 2.1% or 604.17 points to end Monday’s session at 28,844.78 while the Jakarta Composite, Taiex and South Korea’s Kospi all declined by 1%. China’s Shanghai Composite index added 1.9%.
The latest jobs data from the US last week showed the unemployment rate was 5.5%, the lowest since 2008, and that 295,000 jobs were added in February. This resulted in a greater conviction among investors the US Federal Reserve would be prompted to raise rates as early as in June; earlier it was believed the increase might happen any time between June and September. On Monday, the greenback gained 0.30-0.1% against Asian currencies and was up 0.14% against the euro. The Korean won lost 1% to the dollar while the Indonesian rupiah lost 0.8%.
Hitendra Dave, head of global markets at HSBC, pointed out the rupee’s fall should be attributed to the strength in the dollar. “Given that the dollar has moved so much last week after the jobs data, this adjustment was expected,” Dave said. Ananth Narayan G, head, financial markets, South Asia, at Standard Chartered Bank believes any depreciation of the rupee would be gradual. “We are expecting very robust flows but the RBI will 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 the currency,” Narayan said.
So far in 2015, foreign institutional investors have poured in close $11.5 billion into Indian bonds and stocks with just over $6 billion flowing into debt. “Strong global liquidity has been a big driver of the market, and if the US starts tightening, India will get impacted,” Sanjeev Prasad, co-head and senior executive director at Kotak Institutional Equities, said in an interview to Bloomberg TV India on Monday from Singapore. On Monday, the Bank Nifty lost more than 600 points or 3% with lenders such as ICICI Bank and Axis Bank losing close to 4% of their value.