Rupee slides as Chinese yuan weakens, October trade deficit hits mood

The rupee weakened 0.4 per cent against the US dollar on Thursday as a weaker Chinese yuan and outflows of overseas investment dragged the domestic currency lower, dealers said.

The rupee settled at 81.65 per US dollar on Thursday as against 81.31 per dollar at previous close. So far in 2022, the local currency has depreciated 8.9 per cent against the dollar.

A fall in the Chinese currency typically tends to weigh on other emerging market currencies.

The weakness in the rupee was in line with other Asian currencies ahead of public appearances by some members of the US Federal Reserve later on Thursday. While a softer-than-expected US inflation print in October has led to hope of the Fed slowing down the pace of rate hikes, the American central bank is still far from signalling an end to the current tightening cycle.

The greenback held firm globally ahead of the Fed speeches, with the US dollar index at 106.57 at 3.30 pm IST as against 106.04 around the same time on Wednesday, Bloomberg data showed. Higher US interest rates lead to a stronger dollar as global funds flow towards the world’s largest economy.

“The dollar index has entered a consolidative mode while the fall in the Chinese yuan weighed on the Asian currencies. The weakness in the domestic equities, along with foreign fund outflows weighed on the rupee in today’s (Thursday’s) trade,” HDFC Securities research analyst Dilip Parmar said.

“Spot USD/INR is having near-term resistance at 81.90 and support at 81.03. The medium-term trend remains down as long as it trades below 82.40,” he said.

The BSE Sensex and the NSE Nifty fell 0.4 per cent each on Thursday. While foreign portfolio investors have resumed purchases of Indian stocks in November after a hiatus of two months, analysts were wary of the sustainability of strong inflows, given factors such as a higher domestic current account deficit.

“After the US CPI data, the rupee strengthened sharply to the 80.80 per dollar levels, which was a little bit of an over-reaction considering the fundamentals,” HDFC Bank’s executive vice-president of overseas treasury, Bhaskar Panda, told Business Standard.

“The latest data shows a higher trade deficit in October; as long as the trade deficit is rising, that gap will have to be filled and there will automatically be demand for US dollars,” he said.

Data released on Tuesday showed that India’s trade deficit was at $26.91 billion in October versus $25.71 billion a month ago. Exports declined 17 per cent in October, marking the first contraction in two years, the data showed.

So far in November, FPIs have net purchased $3.5 billion worth of domestic stocks. For 2022 so far, however, overseas investors have net sold $18.8 billion of Indian equities, NSDL data showed.