US rate hike fears plunge rupee to record low

Heightened chances of a US rate hike and continued outflow of foreign funds from equities and debt markets plunged the Indian rupee to its new intra-day record low of 68.86 to a US dollar on Thursday.

Besides, political bickering over the demonetisation drive and a stalemate on the contours of the Goods and Services Tax (GST) framework led to the erosion in rupee value.

However, an apparent intervention by the Reserve Bank of India (RBI) arrested any further fall of the Indian currency.

On Thursday, the rupee plunged to its new record low of 68.86 to a US dollar (at 1.14 p.m.).

The Indian rupee weakened by 17 paise to close at 68.74 against a US dollar from its previous close of 68.57 to a greenback.

"The Indian rupee touched its record low level of 68.86 to a US dollar post 1.00 p.m. due to heightened chances of a US rate hike," Anindya Banerjee, Associate Vice President for Currency Derivatives with Kotak Securities, told IANS.

"Apparent intervention by RBI has arrested further falls and stabilised rupee below the 68.86-mark."

Banerjee predicted the rupee would be in a short term range of 68.30-69.60 over the next week.

"We expect dollar to appreciate further, as dollar shortage hits the system. Forward premia has collapsed due to falling interest rate differential between India and US and also swap trades being executed to borrow dollars," Banerjee added.

According to Hiren Sharma, Senior Vice President and Head-Forex Advisory at Anand Rathi Financial Services, rupee's fall was in-sync with other currencies which have declined against US dollar.

"Yesterday's US data and FOMC (Federal Open Market Committee) minutes have strengthened the rate hike scenario in December. Off-loading of debt and equity by FPIs (foreign portfolio investors) has declined rupee," Sharma said.

"But RBI this time around has taken an aggressive stance to halt a complete one way rout. Forward premiums have corrected immensely. In fact, November month, which still has four trading sessions to go, is negative."

Not just the rupee, Indian equities were also suppressed due to the heightened chances of a US rate hike and continued outflow of foreign funds. The key Indian indices closed with losses of more than half a per cent each.

In terms of investments, provisional data with exchanges showed that the foreign institutional investors (FIIs) sold stocks worth Rs 2,010.15 crore.

Since the November 8, when the government announced a move to demonetise higher denomination currency notes and the surprise victory of Republican Donald Trump in the US Presidential election, the Indian equity markets have seen foreign fund outflows worth Rs 15,579.81 crore (from November 9-24).

"Rupee has now depreciated nearly four per cent against the US dollar, since the US electoral outcome, with the FII exit from Indian equities adding further pressure on rupee," Anand James, Chief Market Strategist, Geojit BNP Paribas Financial Services, told IANS.

"The US holiday today may have prompted traders to push dollar and US equities higher yesterday, but that should ease, allowing rupee to take a turn from 69."

--IANS

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