Rupee slumps to record low; nears 69/dollar.

Johnson Cherian.

The rupee slumped to a record low of 68.87 to a dollar in intraday trading on Thursday as foreign funds continued to sell local stocks and debt amid a broader flight of capital from emerging market assets.

Firming expectations that the U.S. Federal Reserve will raise interest rates next month, combined with projections that growth in the world’s largest economy will gather momentum on the back of policy measures that a Donald Trump administration is expected to unveil have helped the dollar post gains against all major currencies.

The rupee’s slide tantalisingly close to the 69 a dollar level prompted the Reserve Bank of India to intervene, helping the currency to pare some of its losses and close at 68.73. The rupee’s previous record low of 68.85 was touched on August 28, 2013.

Currency dealers said state-run banks sold dollars on behalf of the RBI.

“I expect volatility to continue till January, till the time policy makers in the U.S. clearly decide what they want to do,” said Madan Sabnavis, chief economist, CARE Ratings. “The U.S. Fed will continue to hike rates, which may get aggressive later since the economy is expected get into an expansionary mode.”

Foreign institutional investors (FIIs) have dumped a combined $4.2 billion of Indian equity and debt so far this month, according to data on the NSDL website. This is the highest monthly sales of local assets by FIIs since June 2013 and almost three times the $1.5 billion they sold last month.

The rupee is also expected to come under further pressure due to the redemptions of FCNR (B) deposits. Estimates suggest more than half the expected $25 billion of FNCR redemptions are scheduled for the second half of November.

“We believe that the current weakness will continue over the next few days,” Edelweiss Financial Services Ltd. said in a report to clients. “The pressure is expected to ease once liquidity in the system normalises and FNCR redemption pressure eases.”

The brokerage firm, which expects the rupee to weaken past 69, sees the currency hovering around the 69.50 to 70 levels for the next few weeks before the markets normalise.

The benchmark Sensex index snapped two days of gains to drop 191.64 points, or 0.74 per cent, to 25,860.17. Bank stocks like Axis Bank, ICICI Bank and HDFC Bank were among the top losers shedding 1-3 per cent each. Banks have been under pressure as demonetisation has led to a currency shortage.

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