Rupee posts biggest single day fall in 3 years
The Indian rupee suffered its biggest single session fall in nearly three years on Thursday after a grim outlook on the US economy sent investors scrambling for safer currencies and government bonds.
Signs that growth in China and Germany could be slowing down added to the global risk sell off, with local equities posting their biggest one-day drop in more than two-years.
India's central bank was suspected to be selling dollars in the forex market on Thursday at around 49.15 rupees, traders said, but the selling pressure on the rupee was too high for it to contain the drop.
The partially convertible rupee ended at 49.57/58 to a dollar, 2.5 percent lower from its previous close, and its lowest since May 15, 2009.
The unit's fall is the largest single day fall since Nov. 12, 2008 when it dropped 2.6 percent during the peak of the global financial crisis post the Lehman Brothers bankruptcy.
"It is difficult to take a view on future rupee levels currently as it is being driven by sentiment currently. And so long as the risk aversion mood remains, rupee will continue to be under pressure," said Ashish Parthasarthy, treasurer at HDFC Bank.
Parthasarthy added active intervention by the Reserve Bank of India was needed to help subside the panic and "smoothen any wrinkles" in the foreign exchange market.
The steep fall in the rupee will also add pressure on inflation as India imports more than 80 percent of its oil requirements.
"With this rupee weakness to two year low is expected to add up to the inflationary figures putting further pressure on the economy," said DK Aggarwal, chief managing director of SMC Investments and Advisors Ltd.
The euro fell to a fresh eight month low against the dollar on Thursday a day after the Federal Reserve pointed to significant downside risks for the US economy and stopped short of bold monetary easing.
This was at USD 1.3456 at end of rupee trade from USD 1.3652 on Wednesday, while the index of the dollar against six major currencies was 78.506 points from 77.248 previously.
A bulletin released by the RBI on Sept. 13 showed it had not bought or sold dollars in the foreign exchange market in July, for the eight successive month.
The RBI's hands-off policy may have made the unit more vulnerable during periods of risk aversion, a note by Standard Chartered Bank research note on Wednesday said.
Despite the Indian currency being the worst performer so far this year amongst major Asian peers, losing nearly 10 percent against the greenback, some traders believe the currency may rebound going ahead.
"The current bout of weakness in rupee is a short-term phenomenon. Once clarity on growth in euro zone and the United States returns, monies will flow thick and fast into India where fundamentals for growth are still in place," said NS Venkatesh, treasurer at IDBI Bank.
In the mid-quarter review on Sept. 16, the RBI kept its projection of GDP growth for the country in the current financial year unchanged at 8 percent.
Foreign funds have bought USD 485 million of local equities so far this month after having sold USD 2.2 billion in August