Rupee weakens over US Dollar - Currency Market Update
The Indian rupee had been static around Rs.73/$ for a long time. In the last two days i.e. 07 Sep and 08 Sep, the rupee has sharply weakened to Rs.73.58/$. That is a rather sharp weakening in less than two days.
Here are some factors that drove the rupee lower.
a) One of the main reasons was dollar demand from banks and corporates. This demand normally comes up when there are dollar payments due. This led to a spike in value of the dollar and weakening of the rupee.
b) An important reason has been the hardening of the dollar index. The Bloomberg Dollar Index (DXY) measures dollar value against a basket of hard currencies. DXY has been strengthening on hopes that taper will harden the dollar.
c) The dollar has taken cues from the US bond yields. In last 2 weeks, the US bond yield have gone up from 1.23% to 1.36%. This indicates that bond markets are pricing a rate hike by the Fed, which buoyed the dollar.
d) The weakness against dollar is not just with INR, but most Asian currencies. That is because, some portfolio managers are again getting into long-dollar trade, which is likely to put pressure on emerging markets like India.
e) Portfolio flows have also been a factor. After being equity buyers last week, FPIs withdrew $750 million on 06 Sep and 07 Sep. That kind of selling by FPIs has also put pressure on the dollar.
f) Portfolio managers are beginning to express valuation concerns on India with Buffett Ratio shooting up sharply and the India premium over EM valuations at its highest.
The good news is that exporters are selling dollars around 73.70/$ and that could cap the rupee weakness. Clearly, the pressure is visible on the INR after it had appreciated in the last 2 months from 75 levels to 73 levels.
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