NEW DELHI: The US dollar has been on a one-way street strengthened by expectations of rate hike by the US Federal Reserve, which has left many emerging market currencies, like the Indian rupee, in the doldrums.
The rupee extended the losses for the fifth consecutive day on Thursday, and was trading 26 paise down at 68.82 against the greenback. In the process, the local currency hit its lowest level since August 2013. Most analysts see a further fall of up to 2 per cent in the currency, which may now inch closer to 70 level to the dollar.
The greenback continues to register substantial gains against major currencies, with the yen and the euro being the prominent losers ever since Donald Trump pulled off a surprise win in the US presidential election.
In the emerging market space, Malaysian ringgit is down over 5 per cent to claim the tag of the worst performing currency. The rupee is down over 3 per cent during the same period.
“The languishing rupee is down nearly 3 per cent in November, giving heartaches to importers and some comfort to the export-oriented businesses. Foreign investors have offloaded nearly Rs 12,000 crore worth of stocks and almost similar amount in bonds so far in November,” Amar Ambani, IIFL, said.
The widely tracked dollar index, which measures the buck against a basket of six currencies, traded at 101.68 in recent action, up from 101.01 late Tuesday in New York. The index rose as high as 101.78, its peak since April 2003.
“We feel the dollar index will witness further gains, going up to 105 in the coming weeks. The euro seems to be the most vulnerable, influenced by the uncertainty over Italian constitutional referendum in the first week of December,” ICICI Securities said in a report.
Strength in the dollar index does not always spell good news for emerging market currencies, as well as equity and bonds markets in India, say experts.
“FPI flows have turned negative since the outcome of the US presidential election. Rising US bond yields and a strong dollar are the major headwinds for an emerging currencies, such as the rupee,” said Anindya Banerjee, Associate Vice President Currency Derivatives, Kotak Securities.
“At the same time, falling interest rate differential post demonetisation and concerns over growth are adding pressure on the rupee. However, we except RBI to remain vigilant and see the 68:00-69:00 range on spot,” he said.
Abhishek Goenka, Founder & CEO, India Forex Advisors, told ETMarkets.com earlier this week that the rupee might feel the heat in the near term and possibly go down till the70 level, but strong FII inflows could restrict major fall in the long term.
The Reserve Bank of India has probably sold dollars via state-run banks on at least four occasions in less than a fortnight, according to information from traders who asked not to be named.
The rupee’s previous record low in August 2013 came after the US Fed’s signal to end its unprecedented bond purchases spurred an exodus from emerging markets, including India.
Odds for a rate increase at the US central bank’s December 13-14 meeting has reached 100 per cent, according to Bloomberg calculations based on futures.
“The possibility of an interest rate hike in the US is prompting funds managers, who had monies at virtually zero interest rates, to move out partially and book profits in emerging markets, including India,” Jimeet Modi, CEO, SAMCO Securities, told ETMarkets.com.
“Some of the funds, which had invested in bonds to take advantage of interest rate arbitrage, will now start moving funds back to the US, prompting a rise in demand for dollars in the short term,” he said.
India’s benchmark 10-year sovereign bond yield has tumbled 51 basis points this month and is on course for the biggest drop in six years after Modi government made Rs 500 and Rs 1,000 currency notes invalid. The gush of money in banks will lead to brisk buying in government bonds, analysts said.
Source: Economic Times