Rupee near one-month low on Fed rate hike fears

Rupee ended 64.09 compared with previous close of 63.76

Emerging market (EM) currencies came under pressure on Monday, after US Federal Reserve rate rise fears surfaced.

The rupee ended near a month’s low of 64.09 to the dollar, compared with the previous close of 63.76. It opened at 64.04 and during intra-day trade, touched a low of 64.17, where it had ended on May 12.

US jobs data, issued on Friday, boosted the dollar globally on Monday. This raised concern that the US Fed might decide to raise interest rates sooner than later, due to recovery in the economy. Data showed that employers added 280,000 jobs in May, the most in five months.  The positive data led to the weakening in EM currencies.

“There is a clear indication that at least till the Federal Open Market Committee (FOMC) meeting, scheduled for June 15-16, there will be pressure on the rupee. It might depreciate till 64.60, at least till the FOMC meeting,” said Anindya Banerjee, currency analyst, Kotak Securities. The US Fed’s minutes of its April meeting had revealed that a rate rise in June was “unlikely”, due to concern about weaker economic growth.

According to Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai, the Reserve Bank of India (RBI) had intervened in the currency market through dollar sales by state-run banks, which helped the rupee to recover slightly. “The next resistance for the rupee is seen at 64.50 a dollar,” he added. Since the start of this month, the rupee has weakened by 26p. So far this month, there have been foreign outflows of Rs 2,516 crore from domestic markets.

Meanwhile, RBI has been building foreign exchange reserves as a preparation to face the US Fed’s rate increase action, expected later this year. When this happens, it is expected, there will be outflows from EMs such as India.

“We believe that, broadly, the markets will find the appropriate rate for the rupee. Where we intervene is when we find strong flows going in or going out in such a way that the rupee moves significantly and it is temporary and not likely to sustain,” said RBI Governor Raghuram Rajan earlier this month, in a post-monetary policy interaction with the media.

Data issued on Friday showed the country’s foreign exchange reserves rose by $917.5 million in the week ending May 29 to $352.47 billion.