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Rupee in a free fall amid rush to safety! How low can it go?

The fall in domestic equities has added extra pressure on our currency.

Last Updated: Mar 22, 2020, 01.48 PM IST
This week, many governments are writing blank cheques to tackle the economic slowdown because of Covid-19.
By Bhavik Patel
Sr. Technical Analyst, Tradebulls Securities

Rupee touched its all-time low for the first time this week as global risk appetite worsened due to the coronavirus and investors rushing to sit on cash. This has fuelled heavy demand for the US dollar and the dollar index has jumped from 98.20 to 103.80 in 2 days. Asian currencies saw a sell-off in a mad dash to buy US dollar, and the Indian rupee too has succumbed. The fall in domestic equities has added extra pressure on our currency.

This week, many governments are writing blank cheques to tackle the economic slowdown because of Covid-19. US Fed slashed interest rates by 100 basis points to counter the economic impact. This was the second rate cut in a month as earlier on March 3, they lowered rates by 50 basis points. Fed also announced a massive $700-billion quantitative easing programme. ECB also announced 750 billion euros in bond purchases to calm down sovereign debt markets. Six days back, EBC had also unveiled a big bank stimulus package. RBI is behind the curve as they have yet to announce any measures. Domestic banks like YES with a liquidity crisis are already putting pressure on the rupee. Telecom exposures of many domestic banks have been on the receiving end by investors as Supreme Court asked telecom companies to pay their dues. Negative domestic sentiment will always reflect badly on our currency, and so, despite RBI intervention in the Forex market, they have not been able to arrest the slide in the rupee.

Foreign banks are buying US currency for foreign portfolio investors who have pulled out funds from domestic equity markets and that is weighting on the rupee. FIIs have sold to the tune of Rs 47,897 crore this month so far from the equity market. Indian market was expecting a lower repo rate which did not come and RBI announced sell/buy swap for the tenure of six months, pushing premiums higher. To stop US dollar from appreciating because of worldwide demand, US Fed has done an exchange swap auction worth $2 billion. US Fed received bids worth $4.67 billion, where they sell dollars at spot rate and swap those dollars exactly six months later ensuring enough availability of dollars in the system.

Till the situation around the coronavirus remains grim, we expect uptrend to continue. RBI has been intervening in the Forex market to curb volatility and also to push the rupee down, but the selling in rupee is strong enough that RBI has been unable to push rupee below 74.50. Going ahead, we might see some bounce back in the equity market, which will give breathing space for the rupee. Avoid taking any positions at the current juncture, but let rupee settle around levels of 74.50 before resuming any positions.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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