Hits intra-day low on US rate hike fears; RBI deploys $500 million to shore up the unit
The rupee fell to a record low of Rs 68.86 to the US dollar on Thursday after foreign investors unwound their investments in Indian assets, expecting a drop in interest rates in the country following demonetization and a possibility of an interest rate hike in US.
Experts say that the value of the rupee could fall to Rs 70, and then recoup.
The Foreign Currency Non Resident (Bank) redemptions on November 25 also weighed on the minds of investors, leading to the scramble for dollars. The Reserve Bank of India (RBI) strongly intervened to rescue the rupee during intra-day trade, helping the unit close stronger at Rs 68.75 to the dollar.
Forex dealers said that the RBI would have pumped in at least $500 million to support the rupee on Thursday.
The demonetization has also taken the sheen off the rupee. From November 8 to date, the rupee fell by 2.5% and this year it has fallen 3.9%.
On August 28, 2013, rupee had hit its all-time intra-day low of 68.85 against the US dollar and closed at 68.80.
The dollar index hit a fresh 13-year high on Wednesday after an encouraging job data indicated a strong recovery in the US economy, which led to foreign investors starting investing in the US treasury after winding off their investments in emerging markets.
Jamal Mecklai, a currency expert and chief executive of Mecklai Financial, a currency consultancy firm, told DNA Money, "The rupee may fall to Rs 70 or maybe a little lower, then recoup itself. The Rs 66 to Rs 67 levels of the rupee were not the realistic levels of the rupee anyway. The other problem is now is that the demonetization has led to the bank market to be flush with liquidity while the cash market is tight, leading to the rupee losing its value. Dollar strength is bound continue as the US economy strengthens."
Current estimates from the Indian Banks Association suggest that banks have received Rs 6 lakh crore in deposits. And from November 12, RBI has absorbed Rs 80,000 crore on an average from the banking system. Even on November 23, banks deposited Rs 1.2 lakh crore under special window called the reverse repo, which is leading to an excess liquidity build up in the banking system.
Mecklai said the rally in the dollar weighed down on most emerging market currencies including the rupee, Indonesian rupiah, Thai baht, Philippine peso and Malaysian ringgit were seen losing ground.
Mohan Shenoi, head of treasury at Kotak Mahindra Bank, said, "The rupee was mirroring the strength of the dollar, because it gained against the euro and the yen. Demonetization worries may only be temporary as the government is bound to bring in some stimulus to kick-start the economic activity."
The possibility of a rate hike in the US and a rate cut in India is also encouraging many investors to cash in on the gains from emerging markets and move back to the US to reap the benefits of higher interest rates.
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