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Rupee falls most in 2 months on US rate hike fears, breaches 74

MUMBAI: The rupee recorded its sharpest fall in two months on Thursday when it breached the 74 level to close at 74.08 against the US dollar, down 75 paise from its previous close of 73.33.
The domestic currency opened 33 paise lower at 73.65, firmed up marginally to 73.57 and finally closed at the day’s low as the dollar gained against all currencies globally. While all emerging market currencies closed lower, the rupee was the second-worst hit after the Korean won.
The last two months had seen the domestic currency gain significantly after a 113 paise fall on April 7 to 74.56 — the sharpest in 20 months on fears of the second wave of the pandemic. Since then, the rupee had steadily recovered.

The rupee moved in tandem with the equity markets where the sensex closed 179 points lower at 52,323 due to fears of a US rate hike taking place earlier than expected. Banking and finance stocks fell the most, while IT stocks gained, fuelled by a weak rupee which would beef up their export earnings. US Federal Reserve chairman Jerome Powell had said that the bank was ready to alter policy if it sees signs inflation moved “materially and persistently beyond levels consistent with our goal” of 2%. An RBI-published report said that the forex reserves, which crossed $600 billion earlier this month, was enough for 15 months of imports.
According to DBS Bank head (treasury) Ashhish Vaidya, the dollar strength is part of its global move against all currencies and was overdue. “The rupee has been supported by capital flows into new issues and private equity investments. I see 75-75.50 as the outer limit for the rupee as structurally nothing has changed for the dollar,” he said.
Given the level of inflation in India, Vaidya said the current short-term real rates are negative and when central banks keep interest rates controlled, the macro imbalances get corrected through currency adjustments.
The pressure on currency brings into focus the RBI’s determination to keep yields low. “Controlling the yield curve when real rates are negative risks stoking inflation because in India demand will grow because of demographic reasons, unlike the West where there is deflation because of the ageing population. Also, the yield curve as a public good needs to be seen in the context of both manufacturers and savers, especially as we do not have an evolved pension system safety net and controlling the yield curve over a long period may not be a good idea,” he added.



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