Heavy demand for the dollar due to oil-related payments to Iran and massive selling by foreign portfolio investors in the stock markets led to the rupee hitting a new low on Monday. The currency dropped to 66.89/dollar, a level last seen on September 4, 2013, before closing at 66.82, down 0.54 per cent from its previous close of 66.47.
While currency dealers estimated the total oil Iran bill at $6.5 billion, foreign investors continued their selling spree expecting a rate hike by the US Fed. On Monday, FIIs pulled out over ₹800 crore as a direct fallout of the rupee depreciation. In the first three market days of September, global funds have net sold $384 million of Indian stocks, taking outflows this quarter to $2.1 billion, according to Bloomberg.
As FPIs pulled out, the S&P BSE Sensex slipped below the psychological 25,000-mark for the first time in 15 months. The Nifty closed 96 points down at 7,559 while the Sensex ended at 24,894, losing 308 points. All the broader and sectoral indices also closed in the red.
Traders fear that the positive US jobs data released on Friday, which showed the unemployment rate dropping to a seven-year low, will prompt the Federal Reserve to increase borrowing costs for the first time since 2006. Madan Sabnavis, Chief Economist, Care Ratings, said, “The current volatility will continue as the balance of trade and FII flows are negative. Based on fundamentals, the rupee should be in the ₹65-66 range to the dollar. With FIIs re-thinking their emerging market allocations, imponderables could even take it to 67 levels.” Since the beginning of this year, the rupee has lost 5.66 per cent.
However, the Indian unit was better placed than most other Asian currencies. Other Asian currencies closed lower after the Chinese stock market fell on Beijing revising GDP growth rate for 2014 to 7.3 per cent from 7.4 per cent earlier.
“The rupee is still better than other emerging market currencies because of our macros and a more credible central bank,” said Gaurav Dua, Head of Research, Sharekhan. A report by BofA-Merrill Lynch said that the volatility will continue till the market accounts for the upcoming US Fed action, earnings turnaround and Bihar polls. “The rupee has crossed our estimated fair value of ₹55 as well as Governor Rajan’s indicative ₹63-64. It is for this reason that we expect the RBI to anchor ₹65 expectations selling $20 billion if needed. That said, a temporary breach is understandable in view of the seasonal weakness as well as the global uncertainty.”
This copy has been modified to correct Nifty's closing level on September 7 to 7,559, from as 8,559.