Rupee Sees Its Steepest One-Day Drop Since August 2019
The Indian currency fell to a four-month low during trade on April 7, driven down by unwinding of positions in the offshore markets and chatter over the Reserve Bank of India’s new bond-buying programme being akin to quantitative easing.
The rupee fell 1.5% to 74.55 against the U.S. dollar, the steepest one-day drop seen since August 2019, according to data available from BloombergQuint.
A confluence of factors appeared to have driven the sharp fall in the rupee.
The Indian central bank announced a new bond-buying programme called G-SAP, under which it will purchase Rs 1 lakh crore in government securities via the secondary market. Some see this as a QE-like move, which would be negative for the currency.
“A defined government securities purchases-led liquidity infusion via G-SAP is de facto a secondary QE from the RBI,” said Madhavi Arora, economist at Emkay Global. This will imply an increase in primary liquidity and put depreciation pressure on the rupee, she said.
Market participants cited other factors as well such as unwinding of positions in the offshore non-deliverables forwards market, which is used by foreign investors to hedge currency risk.
“The rupee fall has largely been triggered by the fear of a risk-off in the Indian markets, which may be leading to some investors hedging their bets,” said Anand Bagri, head - markets at RBL Bank Ltd. “That’s also evident in massive unwinding happening in the NDF market.”
Concerns around the Indian economy have resurfaced in the backdrop of a second wave of the Covid-19 pandemic that is expected to slow growth. This, along with rising crude prices in Asia, weakening foreign fund inflows amid a strengthening dollar and rising U.S. 10-year bond yields impacted sentiments.
The rupee fall has been building up for the past couple of days, said Harihar Krishnamoorthy, treasurer and head for global markets at FirstRand Bank.
“If one looks at the broader picture, the fall in rupee has been building up for the past few days as it hovered around Rs 73-level against the dollar, but it may have fallen sharply today due to a large demand order, possibly by a large Indian corporate, which didn’t get its matching supply in the marketplace due to poor foreign fund inflows,” he said. “This may also have further triggered stop losses for those who were shorting rupee.”
However, the impact of the rupee depreciation did not spill over into the equity and debt markets, Krishnamoorthy pointed out.
“So the rupee fall is a pure forex market issue as there has clearly been no related impact in the bond and equity markets,” he said. “Besides, the sharp fall is also a confluence of a number of other factors such as dollar index inching up to over 92, the impending scare on poor economic growth due to the second-wave of Covid-19 infections, and rising crude prices.”