The rupee fell 90 paise to a record low of 80.86 against the dollar on Thursday after the US Federal Reserve raised its interest rate by 75 basis points and hinted at more hikes in the future. Opening weakly at 80.27 over its previous close of 79.96 against the greenback, the rupee fell to an all-time intra-day low of 80.95, before ending at 80.86.
On Thursday, foreign institutional investors net sold Rs 2,509.55 crore of shares in the domestic capital market, as per data available on BSE.
Experts said that after the Fed action, the dollar index can see a significant increase and major market currencies, including the rupee, will be under pressure.
“Federal Reserve sounded extremely hawkish. Following that, the US dollar rose significantly against almost all the currencies, and the rupee had to respond,” said Anindya Banerjee, vice president, currency derivatives and interest rate derivatives, Kotak Securities Ltd.
“If we start seeing the rupee depreciating, then from a USD returns perspective for FPIs, India becomes unattractive. We could also witness a reversal of FPI flows in the near to medium term, which will increase market volatility,” said Naveen Kulkarni, chief investment officer, Axis Securities PMS.
He added higher interest rates in the US will force major central banks, including in India, to raise interest rates to stem the pressure on their domestic currencies and with increased interest rates and cost of capital, market multiples can contract.
Meanwhile, equity indices on Thursday retreated for the second straight session. The Sensex fell 337.06 points, or 0.57 per cent, to 59,119.72 and the Nifty by 88.55 points, or 0.50 per cent, to end at 17,629.80.
Experts said despite the fall in the past many months, the rupee’s performance is much better than other major currencies.
In a speech on September 5, Reserve Bank of India (RBI) Governor Shaktikanta Das said so far this year, the rupee has moved in an orderly manner and has held its own in a world of sharp depreciation across other emerging market economies’ and advanced economies’ currencies. “While the US dollar has appreciated by 11.8 per cent during the current financial year so far, the rupee has depreciated by 5.1 per cent, which is among the lowest in the world,” he had said.
Although the Reserve Bank has been intervening in the forex market, it has always maintained that the aim is to curb volatility in the exchange rate and not to target any particular level. Forex traders suspect the RBI to have intervened in the foreign exchange market at the 80.80-80.85 levels on Thursday, which helped the rupee gain 20 paise during the trading session. However, towards the session’s end, it lost those gains, they said.
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The RBI has been selling dollars from the forex reserves in order to maintain the rupee’s stability. From April 1 to September 9, the RBI has used around $55 billion from the forex kitty.
“In recognition of the fact that there is a genuine shortfall of supply of forex in the market relative to demand because of import and debt servicing requirements and portfolio outflows, the RBI has been supplying US dollars to the market to ensure that there is adequate forex liquidity,” Das had said during a speech in July. “After all, this is the very purpose for which we had accumulated reserves when the capital inflows were strong. And, may I add, you buy an umbrella to use it when it rains!”
The RBI’s monetary policy decision on September 30 is the next big event forex market participants will focus on.