Rupee at nine-month low, tracking fall in yuan; Sensex crashes 776 pts

Bank treasuries, and perhaps the RBI are closely tracking the yuan movement, and are devising strategies accordingly

The rupee fell 1.36 per cent against the dollar on Tuesday as Sensex fell 776 points, but it is the yuan, rather than the dollar, that is setting the mood for the currency markets these days.

The rupee closed at a nine-month low of 72.40 a dollar from its previous close of 71.42. 

Bank treasuries, and perhaps the Reserve Bank of India (RBI) are closely tracking the yuan movement, and are devising strategies accordingly. 

This gets even more apparent as even after the sharp fall in the rupee, the RBI did not intervene much in the market. Generally, when rupee moves about 50-60 basis points, the RBI swings in with its intervention, say currency dealers.

The yuan fell from 6.5 a dollar to 7.2 per cent in the last two months, a fall of more than 10 per cent. All Asian currencies responded to that fall, while the rupee responded the most because it was relatively more overvalued than other currencies.

In early July, one yuan was equivalent to 9.93 rupee, now it is 10.08, a fall of about 1.5 per cent. In the same period, however, against the dollar, the rupee has moved from 68.42 a dollar to its Tuesday’s closing of 72.40 a dollar — a fall of 5.5 per cent. This shows that the currency market, and perhaps the RBI, is keeping rupee largely pegged at yuan, while letting the local currency find its level against the dollar. 

“The dealing rooms are observing yuan. The rupee is increasingly getting pegged to yuan. If the Chinese currency is weak, rupee is weakening in sync,” said Abhishek Goenka, managing director of IFA Global, a forex advisory firm.

The US imposed additional sanctions on Chinese goods, and in response, China filed case against US on World Trade Organisation (WTO) and imposed tariffs on $75 billion US goods, including agricultural products.

“It looks like the US-China trade talks are not going to settle amicably. Countries wishing to export goods to the key markets will have to let their currencies depreciate. Clearly, the rupee movement is linked to the yuan’s depreciation,” said Harihar Krishnamurthy, head of treasury at First Rand Bank. 

Rupee also tracked the Sensex, which fell 2.06 per cent to close at 36,562.91 points.

But Krishnamurthy said the portfolio outflows have been continuing, and rupee has been falling even before the sharp fall in the stock market. 

“It is the yuan that is primarily casting a shadow on the rupee. Somewhere the sharp drop in GDP numbers did impact the sentiment, but in a roundabout way,” Krishnamurthy said. 

Rupee was not alone in the fall, as additional tariffs on Chinese goods by the US came into effect, all Asian currencies tumbled to adjust themselves with the Yuan’s fall of about 0.16 per cent against the dollar.

The Korean won fell 0.41 per cent, but the Japanese Yen appreciated 0.10 per cent against the dollar. 

Meanwhile, the dollar index, which tracks the greenback’s strength against global major currencies, rose to a 12 month high of 99.29, strengthening 0.37 per cent from its previous close as risk aversions set in following escalation of US-China trade tensions. 

The spot between the rupee spot and non-deliverable futures (NDF) is also widening, and is now at about 5 paise, from generally 1-2 paise. This indicates a depreciation bias for the rupee.  The six months forward premia for the rupee, meanwhile, was at 4.18 per cent, while the three months LIBOR rates are now at 2.13 per cent.

Currency dealers are advising the exporters to lock in at the present value, as rupee may not depreciate much from here. But importers are showing some hesitation. 

“At this stage, importers are scared to hedge as once rupee reverses they may be stuck with forward contracts at higher rates. Option are being used aggressively for hedging which allows a company to benefit if the rupee appreciates. With forward costs 4.18 per cent, option cost ranges from 2-7 per cent depending on the strikes,” said Samir Lodha, managing director at QuantArt Market Solutions.