“The fear of foreign fund outflows is back to haunt investors as the US Fed policy statement was more hawkish than expected,” said Bhaskar Panda, executive vice president at
. “On the other hand, renewed geopolitical tension is spooking investors, who are again seeking safety of dollar-backed assets. This collectively pushed the rupee to a new record low amid limited central bank intervention.”
Foreign portfolio investors net sold shares worth ₹2,509.55 crore on Friday, according to provisional data. Their domestic counterparts were buyers to the tune of ₹263 crore.
NSE’s Nifty fell 88.5 points or 0.5% to close at 17,629.80. BSE’s Sensex declined 337 points or 0.57% to end at 59,119.72.
Fed chair Jerome Powell made it clear that he wouldn’t stop tightening until he’s convinced of achieving the 2% inflation target. While the Fed’s interest rate hike of 75 basis points to a range of 3% to 3.25% was in line with expectations, the central bank’s projections showing its policy rate rising to 4.40% by year-end before topping out at 4.60% in 2023 was seen as more hawkish than the market anticipated.
“The US Fed is clearly signalling higher-for-longer interest rates, which is a negative for global equity markets,” said Sanjeev Prasad, co-head, Kotak Institutional Equities. “Higher US interest rates will be negative for the US market and higher US dollar will not help the case of emerging markets.”
The rupee lost 1.11% to the dollar, weakening to a lifetime low of 80.87, also the closing level, versus 79.98 a day earlier, Bloomberg data show. It was the second worst performing emerging market currency after the South Korean won. The US dollar index, which measures the unit against othermajor currencies, hit 110.086 in Asia’s morning trade, reaching a new two-decade high.
The RBI was conspicuous by its absence in the currency market Thursday, letting the rupee slide, according to dealers. The central bank had previously been selling dollars to arrest the rupee’s fall beyond the 80 mark. The surprise element added to the local unit’s fall with dealers saying the rupee was charting its natural path, having opened at 80.28 to the dollar. The rupee had earlier plunged to a lifetime low of 80.13 against the US dollar on August 29.
“After a spell of strong central bank intervention, the currency market Thursday witnessed muted intervention,” said Anindya Banerjee, currency analyst at Kotak Securities. “The rupee should now find a natural level of its own beyond which we can again expect resistance. Importers are showing urgency to cover overseas liabilities.”
The lack of central bank intervention led to volatility in the exchange rate. The Bloomberg one-month volatility index spiked 129 basis points to 6.38%. A basis point is 0.01 percentage point. The rupee has lost more than 8% in the calendar year, making it the eighth best performing emerging market currency.
“US Fed policy announcement has fuelled dollar strength, which weighed on all other emerging market currencies including the rupee,” said Parul Mittal, head of financial markets, Standard Chartered Bank India. “The rupee weakening was not due to any domestic factor but followed a global trend that no currency is immune to.”
To be sure, the slide in the rupee will help exporters earn more from their overseas payables. This augurs well for a country striving to gain global export competitiveness.
India’s forex reserves peaked at $642 billion on September 3, 2021. Extensive central bank interventions have eroded the stock by over $90 billion to $551 billon.