Domestic currency hit a low of 66.97 against the greenback

NEW DELHI: While a slide in the dollar following a less-than-expected stimulus by the European Central Bank (ECB) spelt some relief to Asian currencies, the rupee hit a fresh two-year low and was staring at the 67 mark on Friday.

The domestic currency hit a low of 66.97 against the greenback on Friday, the lowest since September 4, before recouping some of the lost ground. At 11 am on Friday, the domestic currency was ruling at 66.84, 22 paise lower than its previous close of 66.66.
The rupee has been an outperformer in the emerging markets (EM) pack this year. However, it has turned a bit volatile of late.

Here is what may have triggered the sudden slide in the domestic currency in Friday’s trade.

Rupee-euro carry trade

The ECB played spoilsport on Thursday by announcing a less-than-expected stimulus for the slowing economy of the region. The move triggered selling across equity markets globally. However, the euro and different Asian currencies, barring the rupee, were trading firm against the US dollar on hope that a rise in the euro will put a halt to the dollar at least for the time being.
The ECB on Thursday cut deposit rate by 0.10 per cent to minus 0.30 per cent (from minus 0.20 per cent) and said it would extend its 60 billion euro, or $63.5 billion a month, bond-buying scheme to at least March 2017.

The euro has around 58 per cent weight in the dollar index, while the Japanese yen has about 14 per cent weight. The dollar index tracks the movement of the dollar against a basket of six major world currencies. A weakness in these economies can push the dollar index high higher, which can in turn influence emerging market currencies.

The index, which was at around 70 level in March 2008, was hovering at around 80 level in June 2014. It recently breached the 100 mark and is now ruling at the 98 level.

The index, which was at around 70 level in March 2008, was hovering at around 80 level in June 2014. It recently breached the 100 mark and is now ruling at the 98 level.

Analysts said there might have been winding up of carry trade between the rupee and the euro, which may have been weighing on the domestic currency.

“‘Short euro, long rupee’ had been an extremely popular carry trade recently and this is now being unwound post the ECB announcement. As a result, we are seeing more rupee selling, which means there will be further upward pressure on dollar-rupee in the near term,” Divya Devesh, Asia Forex Strategist, StanChart, said in an interview with ET Now.

RBI’s liquidity infusion

The Reserve Bank of India will conduct bond purchases of up to Rs 10,000 crore via open market operations (OMO) on Monday. The central bank will also conduct a 28-day variable term repo for Rs 25,000 crore to inject funds into the banking system. Rating agency India Ratings in a note said, “RBI’s decision to infuse liquidity via both term repo and open market operations (OMO) routes will have a salutary and sentiment impact on money market rates as well as bond yields.”

“Theoretically, RBI’s intention to open the OMO window to infuse rupee liquidity may be negative for the rupee. However, losses in the rupee may be contained to a large extent by exporters’ dollar sales and positional unwinding of the dollar as we near the December 15-16 FOMC meeting,” the rating agency added.

Impending Fed rate hike

The real culprit behind the recent slide in the rupee and other currencies globally is the impending Fed rate hike. Fed chair Janet Yellen on Thursday warned that waiting too long to wind up the near-zero interest rate regime could propel the central bank to tighten too quickly. It is most likely that the US fed will raise interest rates in December 15-16 policy.

The Malaysian ringgit is down 17.20 per cent year-to-date. Indonesian rupia has dropped 10.5 per cent. Others such as Thai baht, Singapore dollar and Korean won have fallen anywhere between 5 per cent and 8 per cent. The rupee has shed 5.43 per cent during the same period.

“The rupee has been relatively better performer on the relative sense, but still it has not prevented the rupee from depreciating and I would think RBI would like to keep the rupee somewhat in line with the rest of the EM currency pack for reasons of competitiveness of our exports. So I would not hazard a guess as to how far the rupee can go but obviously the RBI is quite concerned about volatility in the rupee and they will take steps to ensure that there is no undue spike in the level of the of the dollar-rupee,” said Badrish Kulhalli of HDFC Life.

Some experts believe Fed rate hikes would be gradual. “I think there has always been two ways to look at the Fed increase. It is very clear that even if there is an increase, the pace of rate hikes is going to be quite calibrated and measured and slow and slower than it was the last time the US raised interest rates. The second thing is a liftoff means two things – one is that yes, capital costs are going to be higher but, two, its growth is now stabilising and even firming up, which should be good news for most emerging markets. I think that will also play a role in how flows go into emerging markets,” said Atsi Sheth, Moody’s Investors Service.

Since November 1, FPIs have sold Rs 8,900 crore worth of domestic equities.

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