Rupee falls most in 2 months on fears of US rate hikes, exceeds 74
The national currency opened 33 paise lower to 73.65, strengthened slightly to 73.57 and eventually closed at the day’s low as the dollar appreciated against all world currencies. While all emerging market currencies closed lower, the rupee was the second worst hit after the Korean won.
The past two months had seen the national currency gain significantly after falling 113 paise on April 7 to 74.56 – the largest in 20 months amid fears of the second wave of the pandemic. Since then, the rupee has steadily recovered.
The rupee moved in tandem with the stock markets where the sensex closed 179 points lower at 52,323 amid fears of an earlier-than-expected US rate hike. Banking and financial stocks fell the most, while IT stocks rose, fueled by a weak rupee that would bolster their export earnings. US Federal Reserve Chairman Jerome Powell had said the bank was prepared to change its policy if it saw signs that inflation was “materially and persistently above levels consistent with our” 2% target. A report released by the RBI said foreign exchange reserves, which topped $ 600 billion earlier this month, were sufficient for 15 months of imports.
According to Ashhish Vaidya, director of DBS Bank (treasury), the strength of the dollar is part of its global movement against all currencies and was lagging behind. “The rupee has been supported by capital flows in new issues and private equity investments. I see 75-75.50 as the outer limit for the rupee because structurally nothing has changed for the dollar, ”he said.
Given the level of inflation in India, Vaidya said that current short-term real rates are negative and that when central banks control interest rates, macroeconomic imbalances are corrected by currency adjustments.
The pressure on the currency highlights the RBI’s determination to keep yields low. “Controlling the yield curve when real rates are negative risks fueling inflation because in India demand will grow for demographic reasons, unlike in the West where there is deflation due to the aging of the population. . In addition, the yield curve as a public good must be seen in both the context of manufacturers and savers, especially since we do not have a safety net for the evolved pension system and that the yield curve over a long period may not be a good idea, “he added.