Rupee Falls To 16-Month Low As Virus Fears Spread

The Indian rupee fell sharply against the U.S. dollar as more cases of the coronavirus or the COVID-19 virus were reported in the country over the past fortnight. The rapid spread of the virus beyond China has soured the market mood globally, prompting central banks, including the Reserve Bank of India, to assure investors that they stand ready to take action.

That assurance, however, was not enough to stem the fall in the Indian currency. The rupee fell 0.8 percent to close at 73.30 against the U.S. dollar. The local unit has fallen 1.8 percent in the last five trading days.

The weakness in equities is spilling over into the currency market, said Bhaskar Panda, senior vice president at HDFC Bank Ltd. While equity markets have stabilised on hopes of support from central banks, the rupee could continue to depreciate.

“The recent depreciation in the rupee against the U.S. dollar has mainly been due to the coronavirus fears and the foreign investor sell-off...Given these fears the exchange rate could depreciate further to around 74.23,” Panda said.

Should the currency fall that far, it would come within striking distance of the all-time low of 74.45 against the dollar.

Foreigners have turned net sellers of Indian debt and equities, leading to pressure on the Indian currency.

Foreign portfolio investors have sold Rs 8,042 crore in equities and bonds in the first three days of this month alone, shows data from the National Securities Depository Ltd. For the year-to-date, the foreign investors are net buyers to the tune of Rs 1,885 crore.

Oil prices, which have fallen due to concerns of a slump in global economic activity, may act as a mild buffer for the rupee. Since India is a large oil-importing nation, lower prices mean a narrower current account deficit for the country.

How Far Will The Rupee Fall?

Analysts expect the Indian rupee to remain weak but are not willing to hazard a guess on levels the currency is likely to fall to. The ‘black swan’ nature of the coronavirus threat means the currency will continue to react to newsflow.

“It would be incorrect to put a target on the rupee exchange rate because it entirely depends on how the problem spreads and the numbers that will be reported in days to come,” said Samir Lodha, chief executive officer at forex consultancy QuantArt. If travel, offices, factories, conferences, shopping malls across the world, including India, see reduced activity for many months, the rupee could weaken much further. In such a scenario, a move to below 75 against the U.S. dollar can’t be ruled out, he said.

IFA Global Treasury Research Academy, a currency market consultancy, said the premise that the rupee will outperform other Asian and emerging currencies could be tested if new coronavirus cases are detected in India. “If the disease spreads, it would compound the challenges for the government and the central bank who are already grappling with the weakest economic growth in seven years,” it said in a research note.

The outlook on the rupee will be precarious for the next few days, said Madhavi Arora, lead economist, Edelweiss Securities. If there’s meaningful coordinated action from global central banks and governments, some calm could return to the markets, Arora said.