The rupee tumbled 0.85 per cent on Tuesday, responding to the fall in equities due to global risk-off sentiment, breaking the psychological 71 a dollar level.
The local currency closed at a six-month low of 71.40 a dollar, the lowest since February 7.
However, the rupee and the local equities were not an exception. All over the world, emerging market assets fell against the greenback, spooked by the unrest in Hong Kong and a 35 per cent fall in the Argentinian peso, even as the dollar index held stable against major global currencies.
The rupee’s fall, though, was the sharpest in the region, followed by the Indonesian rupiyah, which lost 0.52 per cent. But that doesn’t mean that India’s fundamentals are looking bleak.
The current account deficit is contained at around 2.5 per cent of the gross domestic product; crude oil prices remain steady at below $60 a barrel; and political stability works in favour of India.
The reason for the sharp rupee fall could be traced back to its relative strength held so far. The rupee was recently overvalued by 24 per cent, according to the RBI's real effective exchange rate (REER) index, which tracks the rupee’s inflation adjusted performance against its trading partners, according to Samir Lodha, managing director at QuantArt Market Solutions.
“So, to some extent, it is a catching-up and on an year-to-date basis, the Korean won and Chinese yuan have performed worse than the rupee,” Lodha said.
“The rupee is unlikely to fall below 72.30-40 a dollar level for now, even as a little weak rupee help the country preserve its export competitiveness,” Kanjilal said.