The rupee tumbled to a record low as global funds dumped Indian assets amid the rising chance of a US interest rate increase and as a slump in local yields damped the appeal of the nation’s debt.
The Indian currency plunged to an unprecedented 68.865 per US dollar, falling past its previous low of 68.845 on Aug. 28, 2013.
Emerging markets have been sold off this month as speculation mounts that US president-elect Donald Trump’s reflationary policies would mean a quicker pace of monetary tightening by the US Federal Reserve.
Concern that Trump would take a more protectionist approach to trade has also weighed on developing-nation assets.
Foreign holdings of Indian government and corporate bonds have dropped by 97.2 billion rupees (US$1.4 billion) this month, set for the biggest decline since April 2014, National Securities Depository Ltd data compiled by Bloomberg showed.
Overseas investors have withdrawn a net US$1.7 billion from Indian stocks.
“Continued outflows along with [US] dollar strength have undermined the rupee,” said Gao Qi (高奇), a Singapore-based foreign-exchange strategist at Scotiabank. “The rupee may outperform some regional currencies, such as the Malaysian ringgit and Indonesian rupiah, on account of the central bank’s intervention and low foreign position in Indian financial assets.”
The Reserve Bank of India would take appropriate action to deal with the currency’s decline, a government official said yesterday, asking not to be identified citing rules.
State-run lenders sold US dollars, probably on behalf of the central bank, as the rupee approached its record low, three Mumbai-based traders said, asking not to be named.
The central bank has maintained that it does not target a specific rupee level and intervenes only to curb undue volatility in the currency market.
The rupee’s previous record low came in 2013 after the US Fed’s signal to end its unprecedented bond purchases spurred an exodus from emerging markets such as India.
Its slide this year has tripped fewer alarms as Asia’s third-largest economy has since been overhauled, with policymakers succeeding in narrowing the current account deficit, slowing inflation and building a war chest of foreign-exchange reserves.
“The rupee’s drop to a record low is much less worrisome this time as it’s largely because of the [US] dollar’s strength,” Gao said. “Once the global uncertainties disappear, investors will return to India much faster.”
He forecast that the rupee would recover to 68 per the US dollar by the end of this year.
So far this month, the Indian currency’s 2.9 percent decline compares with a 5.9 percent loss for Malaysia’s ringgit, the worst in emerging Asia, and a 3.8 percent drop in Indonesia’s rupiah.
The New Taiwan dollar has fallen 1.1 percent, the least in the region, while the yuan has weakened 2.1 percent.
Asian currencies’ drop to the weakest this decade would probably deter regional central banks from easing monetary policies as the prospects of higher US interest rates spur capital outflows. Indeed, they are more likely to be stepping in to smooth declines in their currencies.
“Depreciating currencies are making it very hard for the regional central banks to ease monetary policy as falling FX rate raises concerns about inflationary pressure and acceleration of fund outflows,” Toru Nishihama, an emerging-
market economist at Dai-ichi Life Research Institute Inc in Tokyo, said in a telephone interview.
“Most regional central banks will probably have to stay on hold for quite some time,” he said.
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