The rupee plunged to a fresh all-time low on Tuesday as foreign investors pressed sell on fears that the passage of the Food Security Bill in Parliament on Monday would lead to the country overshooting its fiscal deficit target, leading to a sovereign rating downgrade.
The local currency fell to 66.30 per dollar levels in latter part of the trade to close the session at 66.24 to a dollar – down a whopping 194 paise from the previous close.
This was the biggest single-day drop seen since October 1995, according to data from Reuters.
“Investors concluded that this step will lead to a rise in fiscal deficit in future,” said Abhishek Goenka, founder & CEO at India Forex Advisors.
Foreign exchange dealers said trade was one-sided on Tuesday with most dollar demand coming from foreign banks that act as custodians of foreign institutional investors (FIIs).
As per data from BSE, FIIs net-sold Rs1,373 crore from Indian equity markets on the day.
Interventions by the Reserve Bank of India in the spot foreign exchange market were not enough to meet the huge dollar demand.
So far in August, the rupee has lost 10% against the greenback, making it the second-worst performer amid emerging markets and Asian currencies. The Indonesian rupiah is leading the fall in those baskets.
Foreign investors are pulling out money amid fears over uncertain policy structure and deteriorating economic conditions in the country and expectations of winding down of the US monetary stimulus, which are putting negative pressure on the rupee, said Sugandha Sachdeva, AVP & in-charge, currency research, Religare Securities.
“Weighing further on the local currency’s woes is the government’s most recent subsidy programme, the Food Security Bill, which could hurt the country’s already weak finances,” said Sachdeva. She expects the rupee to fall to 67.5 per dollar levels in the near term before it could recover some of its lost ground.
This is despite reassurances from finance minister P Chidambaram that the government is committed to meeting the fiscal deficit target of 4.8% for this fiscal. In 2012-13, India’s fiscal deficit was at 4.9% of the gross domestic product.
To be sure, India’s sovereign rating is currently on the verge of slipping below investment grade and international rating agencies have recently warned of possible action in case the government failed to put the house in order.