Rupee tumbles to 26-month low, RBI arrests slide

Could fall further on Fed moves and if China readjusts the yuan to deal with its own slowdown

The rupee fell on Friday to its lowest level against the dollar in a little over two years, prompting the Reserve Bank of India (RBI) to step in and arrest the slide.

The currency market saw unusual volatility, on thin volume. Currency traders, mostly foreign banks, are staying away from taking positions ahead of RBI’s policy review on Tuesday and the impending US Federal Reserve meetings on December 15-16.

After opening at 66.65 a dollar, the rupee fell to a 26-month low of 66.89, after a large oil marketing company bought dollars to cover its import bills. This prompted the central bank to intervene till the currency strengthened to about 66.80 a dollar, said dealers.

By the end of the day, the rupee recovered somewhat to close at 66.76, down 0.25 per cent, after news emerged that the Prime Minister was reaching out to Opposition parties to get passage through Parliament for the goods and services tax Bill.  

“The rupee being choppy in the last week of November and in December is quite normal, as risk appetite runs thin among traders before the year-end. Hence, whatever little flow hits the market, the movement gets amplified,” said Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch.

Yields on the 10-year bond also followed the rupee as it rose from 7.72 per cent to close at 7.76 per cent on Friday. This closing yield is more than one percentage point over the policy repo rate and is considered unusual. Prices of bonds fall when yields rise.

The fall in the rupee came as the greenback mounted a global rally ahead of a likely interest rate rise by the US Federal Reserve, prompting investors to liquidate their holdings in emerging market assets and take positions in the world’s largest economy.

Since January, foreign portfolio investors (FPIs) have bought Rs 20,526 crore in local equities and Rs 51,826 crore in debt. However, in November till Thursday, they’ve sold Rs 5,252 crore in equities and Rs 2,924 crore in debt, shows data from the Securities and Exchange Board of India.

The dollar index, which measures the greenback’s strength against major currencies, crossed 100 for the first time since March, trouncing the pound, euro and Swedish krona. The loss in Asia was led by the Burmese kyat, which fell 0.7 per cent against the dollar, followed by the Philippine peso and Korean won that each fell about 0.5 per cent.

This year, the rupee has fallen 5.5 per cent and is expected to slide more. While importers could be seen covering their positions, exporters are holding on to their reserves, expecting a further fall. In the foreign, unregulated non-deliverable forwards market, investors are expecting the rupee to fall to 67.76 a dollar in three months.

“We are buying imports but have advised our exporter clients to hold,” said Abhishek Goenka, chief executive of India Forex Advisors Pvt Ltd.

The currency is likely to tumble further on US Fed rate rise concerns, as well as a gradual slowing of the Chinese economy, which could force Beijing to further adjust its currency peg. The previous occasion China readjusted its currency band, the rupee tumbled close to three per cent, to maintain India’s export competitiveness.

Goenka expects the rupee to continue a depreciating bias and said it might top 70 to a dollar in a year. Bank of America, though, expects a climb back to 65-66 a dollar in the medium to long term.

“There would be hiccups due to global events and China but the rupee should be able to regain its strength after readjusting for those shocks,” said Mehta.