The rupee plummeted 1.6% on Monday — the highest in six years — after the Chinese Yuan tumbled to the weakest level in more than a decade, and the Jammu and Kashmir issue compounding it.
The rupee, which breached 70 a dollar on Monday, ended the day at a four-month low of 70.73 a dollar.
Market participants said the central bank intervened in the currency market to stem the depreciation. RBI has always maintained that it would intervene to curb volatility and does not target any levels.
“Since Friday, there was speculative buying since the market was heavily short after the U.S. imposed tariffs on China, which led to depreciation of all emerging market currencies. That spilled onto the rupee as well,” said Anindya Banerjee, currency strategist at Kotak Securities Ltd.
“Today morning, when China suspended all agricultural imports from the U.S., and Yuan dropped below 7 a dollar, it led to a major panic,” he added. At home, the government’s decision to scrap the special status accorded to J&K caused uncertainty among the investor community.
Dealers said the rupee could depreciate further to 71 a dollar.
If rupee continues to depreciate, it will put the Reserve Bank of India in a dilemma when it announces the review of monetary policy on Wednesday.
While the RBI may still go ahead with a rate cut on Wednesday, future policy action on interest rates could depend on the extent of rupee depreciation.
“RBI could ease [rates] by 50-75 bps in the current cycle, but is caught in a bind with rupee fall,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
