Rupee breaches 64-mark, hits 20-month low against US dollar

The rupee fell to a 20-month low of Rs 64.23 to the dollar as Foreign Portfolio Investors (FPI) dumped nearly $4-5 billion worth of investments in the Indian debt markets and another around $2 billion in the equity markets disappointed by the economic policies of the government, particularly its tax policies. However, some experts believe that this is a correction that was waiting to happen and that the rupee was over valued.

The fear that the rising oil price and late rains affecting food prices may put the spot light back on inflation is also spooking investors. The last time the rupee breached the Rs 64-level mark was on September 13, 2014. It fell 1.09% from its previous close of 63.54.

A currency dealer with a leading foreign bank said, "The Modi premium on the economy has gone. Investors do not feel safe to invest in the country. Ugly surprises in the form of retrospective tax issues are forcing the investors unwind their positions in India, particularly in the debt market."

Ashutosh Khajuria, president, treasury, Federal Bank, said, "The rising oil prices are putting pressure on inflation, the late rains are already putting pressure on food prices. The sell-off by the FPIs have brought back the rupee to a 20 month low."

The oil prices have risen sharply from $45-46 a barrel earlier this year in January to $67 a barrel, and it is going to impact the growth prospects in India, with oil forming 80% of the import basket of the country.

Some forex experts believe that the rupee is getting corrected and the domestic and international events were the trigger for this happen. Ananth Narayan, head-financial markets, Standard Chartered said, "I think this is a healthy correction in the rupee. Over the past 15 months, complacency had built up and the rupee was over-valued in REER (Real Effective Exchange Rate) terms by over 13% at one point. We were vulnerable to correction and the domestic and international events have provided the trigger. The underlying macro indicators in the economy and the RBI reserves are still far more robust than two years ago. This move should remain a correction rather than a runaway situation."

India Forex Advisors said in a report, "The rupee depreciated considerably amidst persistent concerns over the tax policies of the government as well as tracking the continued weakness in domestic stock indices."
The government securities market fell sharply on Thursday tracking considerable weakness in the domestic currency. The yields closed 7 to 10 basis points higher over the previous close. The benchmark 10-year bond which is the most traded and liquid bond closed at Rs 102.60, implying a yield of 7.99%.

Hemal Doshi, chief currency strategist, Geofin Comtrade, said, "The rupee broke important critical resistance zone of 63.70/90 on Thursday, on a break of which we saw a big round of covering of short dollar position along with importer hedging their payables in a panic. Risk aversion mood in the Indian asset classes along with taxation worries weighed on rupee."