Mumbai: The rupee weakened 90 paise against the dollar to close at a record low of 58.77 on Tuesday, moving in tandem with a slide in the value of most emerging market currencies, with the domestic currency and the Russian rouble leading the fall.
The sharp fall in the value of the rupee will spur inflation and force the government to hike fuel prices. It also increases prices of local gold vis-à-vis international prices which will make the yellow metal appear like a sound investment despite efforts by the government to dissuade gold purchases. Besides making all imports expensive the weak rupee will make overseas travel and education more expensive.
The present fall has been triggered by a massive selloff by foreign institutional investors in Indian bonds. In 18 sessions FIIs have sold bonds worth $4.7 billion.
Though all emerging market currencies have weakened against the dollar, India will suffer the most because it has the largest current account deficit of $80bn after the US. Around $15bn inflow could be affected
With QE (quantitative easing, through which the US government pumped in huge money into the financial system at low rates) being terminated earlier or on schedule, the implication will definitely mean fewer FII funds coming in, though there would still be positive flows. Around $15 billion could be affected—only affirmative policies within the economy can retain such flows, or else the balance of payments will be under pressure as this cushion will be less supportive," said Madan Sabnavis, chief economist, Care.
Dealers said that there was a demand for dollars from public sector banks which appeared to be on behalf of defence purchases or oil refiners.
"The depreciation of emerging market currencies is a global phenomenon. South Korea has also depreciated against the dollar and so have the Brazilian real and South African rand," said Ashish Vaidya, head of fixed income, currencies and commodities trading at UBS India. He added that RBI intervention has been mild because it sees this as a part of a global phenomenon. "The central bank is following a strategy of containing volatility and going with the trend," he added.
Although there is no word from the Federal Reserve on withdrawal of stimulus, global funds appear to be bracing themselves to a possible early withdrawal of quantitative easing ahead of schedule. The three phases of quantitative easing (or QE1 to QE3) refer to the unconventional monetary measures adopted by the US Federal to inundate money markets with dollars by purchase of debt of up to $85bn every month. Signs of a recovery in US have raised expectations that the Fed would bring an early end to this practice.
In the currency futures market, near-month dollar/ rupee contracts on the National Stock Exchange, MCXSX and the United Stock Exchange all closed around 58.88.
The sharp fall in the value of the rupee will spur inflation and force the government to hike fuel prices. It also increases prices of local gold vis-à-vis international prices which will make the yellow metal appear like a sound investment despite efforts by the government to dissuade gold purchases. Besides making all imports expensive the weak rupee will make overseas travel and education more expensive.
The present fall has been triggered by a massive selloff by foreign institutional investors in Indian bonds. In 18 sessions FIIs have sold bonds worth $4.7 billion.
Though all emerging market currencies have weakened against the dollar, India will suffer the most because it has the largest current account deficit of $80bn after the US. Around $15bn inflow could be affected
With QE (quantitative easing, through which the US government pumped in huge money into the financial system at low rates) being terminated earlier or on schedule, the implication will definitely mean fewer FII funds coming in, though there would still be positive flows. Around $15 billion could be affected—only affirmative policies within the economy can retain such flows, or else the balance of payments will be under pressure as this cushion will be less supportive," said Madan Sabnavis, chief economist, Care.
Dealers said that there was a demand for dollars from public sector banks which appeared to be on behalf of defence purchases or oil refiners.
"The depreciation of emerging market currencies is a global phenomenon. South Korea has also depreciated against the dollar and so have the Brazilian real and South African rand," said Ashish Vaidya, head of fixed income, currencies and commodities trading at UBS India. He added that RBI intervention has been mild because it sees this as a part of a global phenomenon. "The central bank is following a strategy of containing volatility and going with the trend," he added.
Although there is no word from the Federal Reserve on withdrawal of stimulus, global funds appear to be bracing themselves to a possible early withdrawal of quantitative easing ahead of schedule. The three phases of quantitative easing (or QE1 to QE3) refer to the unconventional monetary measures adopted by the US Federal to inundate money markets with dollars by purchase of debt of up to $85bn every month. Signs of a recovery in US have raised expectations that the Fed would bring an early end to this practice.
In the currency futures market, near-month dollar/ rupee contracts on the National Stock Exchange, MCXSX and the United Stock Exchange all closed around 58.88.
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