Rupee weakens as Silicon Valley Bank collapse sparks global risk aversion

The rupee weakened sharply against the US dollar on Tuesday as a global wave of risk aversion sparked by the collapse of California-based Silicon Valley Bank (SVB) hit emerging-market (EM) currencies and dragged stock markets lower.

The domestic currency closed at 82.49 per dollar, against 82.13 at the previous close. So far in 2023, the rupee has appreciated 0.3 per cent against the greenback.

A rebound in the dollar index, caused by the global flight to safety of the US currency, took a toll on Asian currencies, including the rupee.

The dollar index had declined sharply in early trade on Monday, following a steep decline in US yields and speculation of the US Federal Reserve (Fed) going slow on rate hikes in the aftermath of turbulence in the American banking sector.

However, as ripples of the SVB episode were felt in other parts of the US banking system — another lender Signature Bank was taken over by regulators — risk aversion deepened, benefiting the dollar, which is the world’s reserve currency.

The dollar index was at 103.74 at 3.30 pm IST, against 103.59 at the previous close, revealed Bloomberg data.

“The rupee opened lower after the contagion from SVB Financial spread to at least one other bank and market uncertainty on Fed future rate hikes kept risk aversion sentiment alive as Indian equities again tanked by 0.5 per cent,” said Anil Kumar Bhansali, head-treasury, Finrex Treasury Advisors.

“The rupee will continue to move with a weakness bias, as the risk-off sentiment continues in the market, moving within a range of 82.2-82.8,” he said.

While March is usually a month which sees the rupee benefit from dollar sales by exporters and some corporates look at closing their accounts at the end of the year, analysts see the domestic currency facing pressure.

The aversion to riskier EM currencies, coupled with a still uncertain outlook on US rate hikes — inflation in the country remains much higher than the Fed’s target of 4 per cent — has clouded the view on the rupee, observed analysts.

“The rupee has been an outperformer within the EM space over the past few weeks, but we doubt this trend will continue once the seasonal March effect fades,” wrote HDFC Bank Treasury Research.

“We expect the dollar/rupee pair to trade in the range of 82-84 in the coming quarter, with further rate hikes by the Fed to put pressure on the rupee,” it added.