The Indian rupee fell to an all-time low on Friday as maturing non-deliverable forwards and currency futures boosted dollar demand, while the sharp fall led to panic dollar buying by importers.
The rupee weakened to an all-time low of 85.83 against the dollar, before intervention by the Reserve Bank of India (RBI) helped it trim steep losses, according to traders.
At the inter-bank forex market, the domestic currency fell below the 85.50 mark to end at a new all-time low close of 85.53. The Indian currency closed at 85.26 on Thursday.
The central bank’s absence earlier in the session in the face of strong dollar bids drove the rupee down sharply, traders said, prompting panic dollar buying from importers.
However, the RBI “stepped in strongly” towards the close of session, which helped the rupee recover, a trader at a private bank said.
The RBI “seems to be keen to let the rupee adjust and let the overvaluation correct against peers”, Abhishek Goenka, chief executive at FX advisory firm IFA Global said.
The rupee’s 40-currency real effective exchange rate, a measure of its competitiveness against peers, rose to a multi-year high of 108.14 in November, according to central bank data, suggesting an overvaluation of about 8 per cent.
The rupee has been under pressure particularly after the election of Donald Trump and the Fed turning hawkish recently. It has now touched record lows for eight consecutive sessions
Forex circles cited multiple reasons for the sharp fall in the rupee’s value on Friday despite stocks ending the week on a positive note.
They pointed out that
globally the dollar continued to remain firm as the Fed is expected to resort to lower interest rate cuts next year.
The apprehension is also that Trump’s protectionist policies could firm up inflation which is seen as positively impacting the US currency and treasuries.
The dollar index which gauges its strength against a basket of six currencies was trading at 107.96 on Friday against its last close of 108.13.
Back home the rupee has also been hit by persistent FPI outflows from the equity markets due to valuation concerns and as their investment preference shifts to the dollar and treasuries apart from other markets like China.
Moreover, widening trade deficit has also brought pressure on the rupee. While the Sensex ended with gains of more than 226 points on Friday, provisional data showed FPIs being net sellers to the tune of ₹1,324 crore.
Anuj Choudhary – research analyst at Mirae Asset Sharekhan — said the rupee hit a record low on dollar demand from importers towards the end of the month and outflows from foreign investors.
``Rising US treasury yields and crude oil prices also weighed on the rupee,” he added. Choudhary added that the US dollar-rupee spot price could trade in a range of 85.30-85.85. A dealer added that monthly expiry of the December futures contract also put pressure on the rupee and this was also accompanied by shortage of dollars.
The speculation was also that the RBI had short position in the NDF (non-deliverable forward market) and it did not roll-over the positions, resulting in the dollar appreciating in this market.
The NDF is an offshore market where investors enter into financial contracts to hedge on a currency.
Apart from intervening in the spot markets, the RBI has over the past few months also intervened in this market.
For the RBI such an intervention does not lead to a
depletion of the country’s forex reserves since in the NDF market, the counterparties settle the difference between the contracted exchange rate and the prevailing spot prices.
Meanwhile benchmark BSE Sensex rose by 226 points while Nifty settled above the 23800 mark on Friday following gains in auto and banking shares even as investors turned cautious due to FII outflows and a record fall in the rupee.
With inputs from Reuters