Indian rupee ends 0.5% lower as local equities fall for 5th straight session

rupee

The rupee on Monday slid past the 65-mark for the second session in a row and ended at 65.12 to the dollar, 0.5 percent weaker than its previous close, as local equity markets fell for the fifth consecutive session.

Dealers said that the fall was a result of massive recent outflows of foreign funds, both from equities and bonds, due to ongoing geopolitical tensions and a resultant risk-off sentiment.

Foreign fund outflows have been observed across emerging market economies over the last few weeks, with investors preferring safe-haven assets. The dollar has gained against most currencies globally during this time and market participants expect it to trade strong for the next few weeks.

Dealers also said that the market had largely built massive long positions on the rupee when it was trading between 63.50 and 64 to the dollar and therefore, any significant trigger would have resulted in a correction.

This trigger came in the form of the US Federal Reserve announcing that it would start scaling back its USD 4.3 trillion balance sheet from October and left the open the possibility of a rate hike in December.

Also, the Indian government announcing that it would not be able to meet the fiscal deficit target outlined for the ongoing fiscal year and that it would likely overshoot it by around Rs 50,000 crore did not help matters.

Importers, who were expecting the rupee to keep strengthening, were in for a bit of a shock and were forced to shore up on dollars at whatever price they could due to the fear of having to pay a higher price later.

“The rupee will likely keep trading between 64.80 and 65.20 this week,” said a dealer with a foreign brokerage. “If the 65.20 level is breached, we could see 66, maybe more. But that is unlikely in the immediate term.”

The benchmark Sensex and Nifty indices fell 0.9 percent each to 31,626.63 and 9,872.60, respectively. Sensex has declined nearly 3 percent over the last five sessions due to escalating tensions in the Korean Peninsula and worries over the Indian government overshooting its fiscal deficit target.

“Factoring in the global and domestic factors, we expect the 10-year benchmark yield in the range of 6.5-6.8 percent for the rest of FY18. We hold on to our average USD-INR of 65.25 in FY18 on the back of global monetary policy dynamics, geo-political risks, and India’s CAD-BOP dynamics,” Kotak Securities said in a note to its investors.

Other Asian currencies were also trading lower against the dollar, primarily due to the outcome of the German election, where Chancellor Angela Merkel won with a smaller share of the vote.