The Indian rupee crumbled to hit a historic new low on Thursday in a knee-jerk reaction to the US Federal Reserve’s statement that it would scale back its bond purchase programme, upon which the dollar rallied higher against all major world currencies.
The partially-convertible rupee closed at 59.57 per US dollar, against its previous close of 58.71 after hitting an intra-day low of 59.98. In another development, trading in the Indian bond market had to be briefly halted after bond yields breached the set limits due to the massive withdrawal of funds by foreign institutional investors.
The Indian government quickly declared that the rupee was “not in a shambles”, and asserted that it “had the instruments” to tackle the situation. The finance ministry’s chief economic adviser, Raghuram Rajan, said the government, Reserve Bank and Sebi were “alert” to the situation and would take action as warranted. He noted the currencies of all emerging market economies were depreciating. “There is nothing particularly wrong with the rupee right now... I believe over time matters will stabilise. We should not be overtly pessimistic,” Mr Rajan said. “We have a current account deficit which is large, but I believe we are on our way to tapering it. Gold imports are coming off their peaks,” he added.
But with global liquidity expected to tighten after the US Fed action, market participants feel India will find it difficult to finance its widening current account deficit, putting further pressure on the rupee.
“Any move that indicates reduction in global liquidity has possible ramifications on FII inflows, at a juncture when the country can least afford it... This has led to further depreciation in the rupee versus the dollar and has implications for current account deficit, inflation (landed cost of imports) and fiscal deficit (higher oil subsidies). This will also delay any further easing by the RBI, resulting in higher bond yields,” said Ramanathan K, executive director and chief investment officer of ING Investment Management.
It is not only the Indian rupee that was a victim of the US Fed statement, all the other emerging nations’ currencies got hurt too. The South African rand and Mexican peso were also down by close to two per cent against the dollar. “Going ahead, the rupee is likely to continue with its bearish trend as the dollar has started gaining momentum once again,” said Abhishek Goenka, founder and CEO, India Forex Advisers.
“We expect the rupee to hit 60.20 to the dollar in the coming days. If it breaches that limit, it can go further
lower to 61 per dollar,” said Mohan Shenoi, Kotak Mahindra Bank’s group treasurer.
UK-based Equentis Capital said: “If the ongoing FII selling in bond markets continues and the RBI does not intervene to stem the fall in the rupee, we expect the rupee to touch `62-63 levels in the near future.”