Riding on global currency volatility wave, the rupee on Friday plummeted sharply by 29 paise to close at a fresh two-year low of 65.83 against the US dollar on high demand for greenback from banks and importers.
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In the last five sessions foreign funds have sold $1.63 billion. This, he says, is on the back of stronger fundamentals and the Real interest rate of the rupee.
Heightened fears of a China-driven global economic crisis as well as worries of imminent Fed rate hike predominantly kept intense pressure on the domestic currency.
Overseas investors have also pulled out almost Rs 2,000 crore from the Indian stock markets since the beginning of the month. The prognosis for the current year is 7- 7.5 percent, not bad given that all other emerging economies are set to suffer contraction.
The rupee weakened due to decrease in domestic equities. This has triggered fears of similar steps by other countries that may prefer to lower their currency’s value.
Indian markets staged a recovery on Tuesday but this could be a short-lived uptick. Next direction of trade of the rupee will be appeared shortly, they said.
The gains in rupee were further supported by gains in equity and debt markets. In terms of Sensex, all the 30 shares that go into the bellwether’s basket ended in the red.
During the day, the Reserve Bank of India (RBI) deputy governor SS Mundra said that India can not be disconnected from global events. Instead, most FIIs are still overweight India, he added. “I would believe that in the medium to long term, we are on the right path. The reform agenda is progressing in the right direction”.
While Indian economy is witnessing a period of interest, the rupee is nowhere near the grave currency depreciation faced by the Brazil, Russia, China and South Africa (part of the BRICS group of emerging markets). “Markets will settle down once the turbulence is over”.
While Rajan indicated that there may be a need for corrective action and that RBI would not hesitate to use its foreign exchange reserves to limit the freefall of the rupee, Finance Minister Arun Jaitley said that the “ripple” effect on Indian economy is only “transient”.
The rupee has been under stress against the dollar for the last two weeks, since China first devalued its currency to make its exports more competitive in the world markets.
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Meanwhile, the benchmark 10-year bond yield was trading at 7.81 percent compared to its 7.89 percent close on Monday.
