MUMBAI (BLOOMBERG) - The rupee tumbled to a record low as global funds dumped Indian assets amid rising odds for a US interest-rate increase and as a slump in local yields damped the appeal of the nation's debt.
The Indian currency plunged to an unprecedented 68.8650 per US dollar, falling past its previous low of 68.8450 reached on August 28, 2013. It was down 0.3 per cent at 68.7950 as of 1:32pm in Mumbai.
Emerging markets have sold off this month as speculation mounts that Donald Trump's reflationary policies will mean a quicker pace of monetary tightening by the Federal Reserve. Concern that he will take a more protectionist approach to trade has also weighed on developing-nation assets.
The S&P BSE Sensex index of local shares slid 0.7 per cent on Thursday, halting a two-day gain. Foreign holdings of Indian government and corporate bonds have dropped by 97.2 billion rupees (S$2.03 billion) in November, set for the biggest decline since April 2014, National Securities Depository data compiled by Bloomberg show. Overseas investors have withdrawn a net US$1.7 billion from Indian stocks.
"Continued outflows along with dollar strength have undermined the rupee," said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. "The rupee may outperform some regional currencies such as the Malaysian ringgit and Indonesian rupiah on account of the central bank's intervention and low foreign position in Indian financial assets."
The Reserve Bank of India will take appropriate action to deal with the currency's decline, a government official said earlier on Thursday, asking not to be identified citing rules. State-run lenders sold dollars, probably on behalf of the central bank, as the rupee approached its record low, three Mumbai-based traders said, asking not to be named. The RBI has maintained that it doesn't target a specific rupee level and intervenes only to curb undue volatility in the currency market.
The rupee's previous record low came in 2013 after the Fed's signal to end its unprecedented bond purchases spurred an exodus from emerging markets like India. Its slide this year has tripped fewer alarms as Asia's third-largest economy has since been overhauled, with policy makers succeeding in narrowing the current-account deficit, slowing inflation and building a war chest of foreign-exchange reserves.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, extended gains after rising 0.6 per cent on Wednesday, when it reached the strongest level since at least 2005. Odds for a rate increase at the US central bank's Dec 13-14 meeting have reached 100 per cent, according to Bloomberg calculations based on futures.
"The rupee's drop to a record low is much less worrisome this time as it's largely because of the dollar's strength," said Qi of Scotiabank. "Once the global uncertainties disappear, investors will return to India much faster." Qi forecasts the rupee to recover to 68 per dollar by the end of 2016.
The Indian currency's 2.9 per cent November decline compares with a 5.9 per cent loss for Malaysia's ringgit, the worst in emerging Asia, and a 3.8 per cent drop in Indonesia's rupiah. Taiwan's dollar has fallen 1.1 per cent, the least in the region, while China's yuan has weakened 2.1 per cent.
India boasts of the fastest expansion among the world's major economies. The nation's current-account deficit was US$0.3 billion for the April-June quarter, compared with US$21.8 billion in the same period in 2013. Foreign-exchange reserves surged to a record US$372 billion at the end of September. The hoard has fallen to about US$367 billion as of Nov 11, a sign for some investors that the central bank has been supporting the rupee.
India's benchmark 10-year sovereign yield fell four basis points on Thursday. It has plummeted 55 basis points this month, on course for the biggest drop since April 2009, as a banking system awash with cash boosts demand for debt and easing consumer prices raise expectations of more interest-rate cuts.