Mumbai: The rupee Thursday lost a whopping 39 paise -- its biggest single-day fall in three months - against the US dollar to close at 66.85 after the Army carried out "surgical strikes" last night on terror launchpads across LoC.


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Overall sentiment turned highly volatile on fears that heightening tensions between India and Pakistan could bitter sentiment for foreign investors who have been pumping funds into the world's fastest emerging economy.


Month-end dollar demand from oil companies along with aggressive hedging strategy adopted by importers in the wake of currency volatility mainly weighed on the rupee trade.


In parallel, the benchmark BSE Sensex tumbled over 465 points to end at 27,827.53.


At the Interbank Foreign Exchange (Forex) market, the domestic unit commenced higher at 66.44 from last close of 66.46 and firmed up further to 66.42 on sustained selling of the greenback by exporters and banks amidst higher opening in the domestic equity market.


However, the rupee suffered a big blow in noon trade and witnessed a sharp downturn to hit a low of 66.92 after reports of surgical strikes against Pakistan flashed alongside a massive fall in local equities.


It remained under immense pressure throughout the day witnessing high amount of volatility and wide swings before recovering some ground to end at 66.85, showing a steep fall of 39 paise, or 0.59 per cent.


The rupee had appreciated by a healthy 56 paise in the last five trading sessions after the Federal Reserve left interest rates unchanged in its September policy meet.


However, anticipating carnage on the forex market, intervention from state-run banks on behalf of RBI largely helped the currency to cut some early losses, according to currency dealers.


Any tension across the border is definitely going to hurt sentiment, they added.


Meanwhile, the greenback recovered against its major trading peers ahead of US GDP data release later in the day.


The dollar index was trading up by 0.20 pct at 95.47 as against a basket of six currencies in late afternoon trade.


RBI today fixed the reference rate for the dollar at 66.5521 and euro at 74.6848.


In cross-currency trades, the rupee drifted sharply against the pound sterling to end at 87.05 as compared to 86.52 and retreated against the euro to settle at 75.00 from 74.51 yesterday.


It, however, remained firm against the Japanese yen to finish at 65.89 from 66.00 per 100 yens.


The BSE Sensex nosedived 465.28 points to end at 27,827.53, while broder Nifty plunged 153.90 points to 8,591.25.


In the meantime, foreign portfolio investors (FPIs) bought shares worth a net Rs 3,413.37 crore today, as per provisional data from exchanges.


In the forward market, premium for dollar declined due to fresh receiving by exporters.


The benchmark six-month premium for February declined to 158-160 paise from 160-162 paise, while the forward August 2017 contract edged higher at 344-346 paise as compared to 342-344 paise earlier.


Crude prices rebounded sharply after oil nations grouping OPEC surprised the market by announcing cut in production from November.