The rupee on Thursday declined by 53 paise to near three-month low of 64.80 against the US dollar. There was a strong buzz in the forex market that the government may allow the local currency to depreciate in order to help exporters whose worries figure prominently in the stimulus package being readied by the government.
The rupee ended the day at 64.80 a dollar, a level last seen on July 3, down 0.81 per cent from its Wednesday’s close of 64.27.
The 10-year bond prices fell to four-month low on anticipation of rate hike by the US Federal Reserve. The 10-year bond yield ended at 6.675 per cent, a level last seen on May 24, compared to its previous close of 6.577 per cent. Equity benchmark BSE Sensex fell 0.09 per cent or 30.47 points to close at 32,370.04. The Federal Reserve left interest rates unchanged but signalled that a further rise in short-term borrowing costs was possible. The Federal Open Market Committee (FOMC) also said it would begin unwinding in October its $4.2 trillion bond portfolio built up in the wake of the financial crisis.
Anindya Banerjee, currency analyst at Kotak Securities, said, “A couple of factors, including both global and domestic, led to the rupee’s weakening. The US Fed’s hawkish statement led to a rise in the dollar. Secondly, there was a positioning in the market as the market was heavily short on the dollar and long on the rupee. The rally in the dollar triggered a stop loss. Since morning, traders and exporters were buying dollars and by afternoon importers that were grossly under-hedged also started buying dollars. Thirdly, the speculation that the government may allow the rupee to depreciate as part of the export measures also led to rupee weakening.”
“We think 65.20 is a key level and if that is crossed, we will see more stop losses being hit with more importers buying dollars and the rupee touching 66 levels,” added Banerjee.
The rupee has appreciated against the dollar by about 7 per cent in nominal terms since November 2016 lows, while the appreciation in real terms have been even more significant. It is not yet clear how much rupee appreciation has played a part, but net exports have subtracted 2.6 per cent from growth in April-June 17, leading to a lower-than-anticipated GDP outturn.
“The RBI has been defending the rupee at around 64 levels and should continue to arrest further appreciation of the rupee, given competitiveness and growth considerations. Too much rupee appreciation has led to a tightening of monetary conditions, which need to be arrested in order to provide a bigger support to growth,” said Kaushik Das, chief economist at Deutsche Bank.
“With the reserves adequacy position remaining considerable and prospect of reserves likely to increase further in the period ahead, a case can be made in favour of using a small portion of these reserves for public investment, which in turn could help to support growth. If $15 billion worth of forex reserves were channelled toward public investment in infrastructure, we estimate this would reduce total reserves by only 3.5 per cent but would add about 0.6 per cent to GDP (Rs 960 bn at current exchange rate),” said a Deusche Bank report.
According to the latest forex available, India’s forex reserves are at all-time record of over $400 billion, Harihar Krishnamoorthy, treasurer at FirstRand Bank, said, “The US Fed’s consideration to hike rate in December and unwind its balance sheet in October pressurised all emerging market currencies including the rupee.