MUMBAI: There seems to be little respite for the common man with the rupee plunging to a record low of 77.71 to the dollar on Tuesday, threatening to make imported items like crude, gold and some food items costlier.
A fall in the rupee makes imports costlier.
Tuesday's fall by 8 paise to a record closing low is believed to have been driven by dollar buying by banks to meet likely corporate or FII demand with the benchmark 10-year-bond yield jumping to 7.52% , up almost 100 bps from its coupon of 6.54%.
"The decline in the local unit is likely to have been driven by corporate or FII demand for dollars , amid outflows from both debt and equity markets, thanks to the spurt in the 10-year GoI bond yield," said KN Dey, managing partner, United Financial Consultants.
Analysts also expect RBI to have intervened in the currency market to stem the fall in the local unit, which hit a low of Rs 77.73 intraday.
The rupee's fall came on the eve of the Monetary Policy Committee decision on interest rates on Wednesday. Financial markets have priced in a 35-50 bps hike in the rate at which RBI lends to the banks, expectations of which have been reflected in the benchmark 10-year yield spike .
A hike in the rate by 50 bps could cushion the rupee's fall in the near term. However, it could also result in higher outflows from the debt market as bond prices move inversely to yields .
NSDL data shows that since the beginning of the calendar year FIIs have sold bonds worth Rs 14086 crore. Pressure on the unit has risen with rising crude prices and a stronger dollar leading to FII outflows from Indian equities too.
So far this calendar year, FIIs have sold shares worth a record Rs 1.75 lakh crore. When FIIs repatriate funds overseas, they sell the rupee to buy the dollar, increasing the pressure on the local unit.
An expert expected the rupee to test Rs 80 to the dollar by month end. However, he didn't rule out an immediate pullback driven by the expected Monetary Policy Committee rate hike.