MUMBAI: Panic gripped the foreign exchange markets on Tuesday as the rupee dropped by 0.52% to close at 88.7925 against the greenback, an all-time low. This came amid sustained selling by foreign funds fearing that the double-whammy blows of steep US tariffs and an increase in H-1B visa fees would now disrupt services exports apart from crimping remittances.
The previous low was 88.47 on September 11. Traders are expecting the pressure on the rupee to continue, with a level under 90 not very far off.
The rupee opened the day down 13 paise but soon lost ground, touching an all-time intraday low of 88.82 against the US dollar, and finally settled for the day at 88.7925 losing 51 paise from its previous close.
Forex traders said the rupee's fall occurred as they analysed the likely repercussions of the new $100,000 H-1B visa levy that may precipitate a slowdown in remittances growth and curtail service exports to the US, which is the largest revenue market for domestic IT companies netting more than 60% of their revenue.
Traders said, however, volatility expectations barely budged as the three-month dollar/rupee implied volatility was at six-month lows, and one-year volatility at a year-to-date low.
Implied volatility is a key metric for pricing options, and typically rises when emerging market currencies hit lifetime lows, reflecting expectations of wider fluctuations. But this has not been the scenario for the rupee, which analysts attributed to the increased participation of companies in the options market and subdued offshore demand for options that bet on a rupee decline. By hedging dollar exposure with options that cost little, companies are effectively supplying volatility to banks, contributing to subdued expectations for rupee swings.
Corporate activity in dollar/rupee options has surged 70% to $73 billion between January and August, compared to the same period last year, a trader said, citing data from clearing platforms. The market was valued at less than $20 billion in 2020.
Another trader with a private sector bank said that the RBI has been conspicuously absent from the market for a while now, which implies that the monetary authority wants to help cushion the exporters’ margin hit by the whopping 50% levy on their shipments to US customers.
“But what is to be noted is that while exporters gain a bit, the economy as a whole will be losing by way of imported inflation. This is more so for a nation that is a net importer, with the import bill far outstripping the export bill. While a falling rupee may give a reprieve, in the long run it will hurt us more. The only saving grace is that crude prices are stable,” the trader cited above told TNIE, requesting not to be quoted.
Brent crude, the global oil benchmark, was trading 0.41% higher at $66.84 a barrel in futures trade. However for long, the fuel has been quoting under $70 only, giving a big cushion to India's import bill.
Current RBI governor Sanjay Malhotra, under whom the rupee has lost the maximum, has let the rupee trade within a wider band compared to his predecessor Shaktikanta Das. When Malhotra took over last December, the rupee was under 84.
The RBI maintains that its exchange rate policy is focused on ensuring orderly market conditions and limiting excessive volatility.
“We expect the rupee to remain weak as the US visa fee hike may continue to dampen domestic market sentiments and may result in foreign outflows. However, overall weakness in global crude prices may support the rupee," said Anuj Choudhary research analyst, currency and commodities, at Mirae Asset ShareKhan. He expects the spot rupee to trade in the 88.45-89.20 range in the medium term.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.06% lower at 97.28.
Equities, however, fared much better than on Monday with the Sensex closing only 58 points down and the Nifty dropping 33 points. This is despite foreign investors selling equities worth Rs 2,910 crore on Monday. Foreign funds have already pulled out a tad over $12.5 billion from domestic equities this fiscal so far.
Commerce minister Piyush Goyal is in the US for trade talks. The minister will visit New York, accompanied by the special secretary in the ministry Rajesh Agrawal and other officials.