Rupee sees biggest drop since March 14 on likely Fed hikes

The decision of the Organization of the Petroleum Exporting Countries (OPEC) to announce an oil production cut also hurt the rupee as importers rushed to lock in purchases of the dollar-denominated commodity.

The rupe closed at 82.68 per US dollar, against 82.31 Friday. Monday’s move in the rupee marked the steepest single-day decline in the local currency since March 14, Bloomberg data showed. Data released after Indian trading hours on Friday showed the US non-farm payrolls rose by 339,000 in May, far more than a Reuters estimate of around 190,000 jobs additions.

“Upbeat US jobs and the debt-ceiling deal optimism allow DXY (dollar index) and 10-year UST yields to remain firm. The Chinese yuan remained under renewed pressure, adding to the rupee depreciation,” said Kunal Sodhani, vice-president, Shinhan Bank.

Agencies

While recent comments by Federal Reserve officials indicate the US central bank may skip a rate hike in June, the upbeat jobs data has made it difficult to rule out further tightening in coming months. Higher US interest rates lead to a stronger dollar, exerting pressure on emerging market currencies, like the rupee.The US dollar index rose well past the 104 mark on Monday, climbing to 104.26 during Indian market hours. The index was around 103.95 on Friday.

“Dollar demand in the NDF (non-deliverable forwards) market was also seen while oil prices rose as well after production cuts. Forward premium also saw a drop across the curve. For USD/INR, 82.30 continues to act as a good base while 82.90 is a resistance,” Sodhani said.While most Asian currencies weakened against the US dollar on Monday, the rupee underperformed, ranking tenth among 11 currencies, Bloomberg data showed.

“An interest rate pause from RBI is also set to weigh on the currency as a narrow interest rate differential disincentivises investors,” HDFC Securities research analyst Dilip Parmar said.

With US bond yields having risen at a faster clip than their Indian counterparts, interest rate differential between the two countries has shrunk, thus eroding the appeal of domestic assets for overseas investors.