Indian rupee on Friday weakened past 81 mark to a fresh record low against US dollar for the first time while 10-year bond yield jumped 6 basis points to hit over two-month high on the back of surge in US treasury yields.
The home currency opened at 81.03 a dollar and touched an all-time low of 81.26. At 9.15 am, the domestic currency was trading at 81.15 a dollar, down 0.33% from its previous close of 80.87. This was the seventh out of eight sessions when the currency dropped and lost over 2.51% in this period. So far this year, it fell around 8.48%.
It was not immediately clear whether RBI had intervened in the currency markets. Analysts said one of the reasons for which RBI could not rescue the fall in the currency was inadequate liquidity in the banking system which is currently in deficit. RBI's intervention in the spot market could make the case worse for the banking system liquidity amid short-term interest rates going higher, analysts added.
CR Forex said in the absence of any RBI action, the rupee could test new lows in the short term and it could trade in the range of 81.80 and 82.00 in the near term. Traders are now awaiting the next RBI policy and its action to smoothen the liquidity and talk about the current run in the currency and falling reserves.
The Monetary Policy Committee, which decides the benchmark rates, is scheduled to meet during September 28-30. The decision is expected on September 30.
Meanwhile, ICICI Direct expects rupee to show continued resilience as inflows from FIIs are expected to be up to $30 billion in FY24, if JP Morgan includes government bonds in its index. "Rupee as long as it sustains above 79.00 it is likely to depreciate till 81.50 in the coming month amid strong dollar and concern over widening of the trade deficit. However, possible RBI intervention in the forex market to curb volatility may prevent sharp rupee depreciation," said ICICI Direct in its recent report.
On Thursday, the US federal reserve raised the rate by another 75 basis points and surprised the markets by projecting further sizeable hikes in the coming months. In addition, the Fed's updated economic projections showed slower GDP growth and higher inflation.
Post this, analysts now anticipate the Fed to raise rates by another 75 bps in November, 50 bps in December and a final 25 bps hike in February 2023.
"The risks for policy rates may still be skewed to the upside given sticky, elevated inflation. One key question relates to the outlook for the labor market. So far this year, monthly job creation has remained strong, with many businesses continuing to say that their demand for labor outstrips the available supply of workers. Over time, we expect to see a reduction in job vacancies, a rise in unemployment, and slower wage growth, but the timing of these developments will be crucial for Fed policy," said HSBC in a note to investors.
The 10-year bond yield was trading at 7.383% - a level last seen on 25 July, up 7 basis points from its previous close of 7.383%. The US 10 year treasury yield soard 18 basis points to 3.7% on Thursday, its highest in a decade as traders weighed the risk of recession.
Asian currencies were trading mixed. China Offshore fell 0.3%, China Renminbi 0.27%, Taiwan dollar 0.1%. The Philippines peso was up 0.3%, South Korean won gained 0.27%, and the Japanese yen 0.2%.
The dollar index, which measures the US currency’s strength against major currencies, was trading at 111.408, up 0.05% from its previous close of 111.353.(With inputs from Bloomberg)