The rupee breached the psychological barrier of 70-to-a-dollar for the first time as the sharp fall in the Turkish lira continued to affect all emerging market currencies.
The rupee had a strong opening against the dollar at 69.85, but fell sharply to breach the 70-mark and went on to depreciate till 70.08, prompting the central bank to intervene, currency dealers said. On Tuesday, the rupee declined 1.6% against the dollar to close at 69.93. “The rupee is the victim of a contagion effect impacting all emerging markets triggered by the Turkish crisis,” said B. Prasanna, group executive and head — Global Markets Group, ICICI Bank.
‘FII outflows spur trend’
“The swift move past 69 happened due to Foreign Institutional Investor (FII) outflows and the need to hedge existing short dollar positions in the market, driven by global market sentiment rather than actual importer demand,” Mr. Prasanna said, adding the rupee will need to depreciate in the medium term to keep up with the inflation differentials with other trading partners.
The domestic currency ended the day at 69.89 to a dollar. The rupee is the worst performer in Asia this year, depreciating 9% against the dollar. The current account gap is widening mainly due to a rise in international crude oil prices as India imports more than 80% of its requirements.
A depreciating rupee puts pressure on prices and hence makes it difficult for the Reserve Bank of India which wants inflation within a range. RBI has raised its key policy rate, or the repo rate, in the last two policy meetings by 25 basis points each to 6.5%. “This sudden fall is from the fear of potential Turkish Lira impact on emerging markets currencies, from which the rupee value can’t stand out when current account deficit is moving up sharply and flows into the capital account is on a decline,” said Moses Harding John, CEO, India and East Africa, SBM Holdings Limited.
‘Optimism on economy’
“The comforting factor, however, is the optimism on domestic macroeconomic fundamentals, optimism on growth and comfort on inflation and fiscal deficit.”
Abheek Barua, chief economist at HDFC Bank, said while the country is positioned better in terms of vulnerability ratios, the run towards safe haven assets could lead to further depreciation in the short run.
