Rupee falls sharply after Yellen renews call for raising US debt ceiling

The Indian rupee depreciated sharply on Monday after US Treasury Secretary Janet Yellen renewed her call for raising the country's debt ceiling to avoid a possible debt default by the world's largest economy.

“The US has never defaulted. Not once. Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost," wrote Yellen in her opinion piece in The Wall Street Journal.

“We would emerge from this crisis a permanently weaker nation,” Yellen, who earlier served as US Federal Reserve chairperson, wrote.

"We can borrow more cheaply than almost any other country, and defaulting would jeopardise this enviable fiscal position. It would also make America a more expensive place to live, as the higher cost of borrowing would fall on consumers," she said, adding, "Mortgage payments, car loans, credit card bills—everything that is purchased with credit would be costlier after default."

Yellen did not mention the timing of the default, but had earlier said that a default could come during October when the Treasury exhausts its cash reserves and extraordinary borrowing capacity under the $28.4 trillion debt limit, Reuters reported.  

Following her article, the dollar index strengthened, pulling most of the global currencies down. The index measures the greenback’s strength against major currencies. The dollar index rose 0.16 per cent to 93.3420, a monthly high, as of 10.45 AM in India.  

The rupee opened at 73.8250 a dollar, down from its previous close of 73.48. At 10.50 AM, the rupee was at 73.6750, brought down by nationalised banks selling dollars, possibly on behalf of the central bank. The 10-year bond yields were relatively stable at 6.16 per cent.  

The Sensex, BSE’s benchmark equity index, however, was up 115.21 points to 59,131.10 points, giving support to the rupee.

Currency dealers say the RBI has stepped in with intervention in the market to smoothen the volatility. According to the market sources, margin calls have been triggered, but the positions taken were thin, ahead of the upcoming US Federal Reserve meetings on Tuesday and Wednesday. The currency market was also cautious due to the increased possibility of a debt default by China’s real estate behemoth Evergrande Group. 

The rupee had also come under pressure after Yuan depreciated. The rupee tracks both dollar and the Chinese currency closely.  

“The majority of the market participants expect a timeline on possible Fed tapering during this meet while the recent mixed US economic data have led to varied expectations. Any additional clarity by Fed on trimming down its bond purchase program in November would help US Dollar to extend gains," said Imran Kazi, vice president at Mecklai Financial.  

“In addition, the dot-plot too, would be in focus as the market would want to take cues about the timing of interest rate hike," Kazi said.

US Fed Chair Jerome Powell in his Jackson Hole speech had recently assured that rates won’t be raised in a hurry, while indicated taper is some time away, but the market is now expecting tantrums, especially after Yellen repeating her warnings on possible US debt defaults if the borrowing ceiling is not raised or removed by the Congress.

“Weaker global bias on account of China’s deteriorating fundamentals and rising tapering expectations from the Fed is setting a bullish tone for the USD," said Amit Pabari, managing director of CR Forex.  

The rupee could close at 73.80-90 a dollar level today, but “if that is taken out then we could move towards 74.20-74.40 levels,” Pabari said.