The Indian rupee hit a record low on Tuesday due to worries about a growing trade deficit and potential outflows from local equities, but central bank intervention limited the decline, with the rupee closing at 84.8950 against the US dollar, down 0.04 per cent for the day.
The BSE Sensex and Nifty 50 indexes both dropped by more than one per cent, mainly driven by weakness in financial stocks and Reliance Industries.
Investor sentiment was negatively affected by the news that India’s merchandise trade deficit reached a record high of $37.84 billion, mainly due to increased gold imports.
Foreign banks were seen buying dollars, possibly for custodial clients, while the Reserve Bank of India likely intervened through state-run banks to prevent further depreciation of the local currency, according to traders.
The growing trade deficit has strengthened the upward pressure on the USD/INR exchange rate, with a move above 85 expected in the near future, as noted by a trader at a private bank.
The dollar index rose by 0.2 per cent to 107, while other Asian currencies, particularly the Thai baht, weakened.
US bond yields increased during Asian trading as investors awaited the Federal Reserve’s policy decision scheduled for Wednesday during US market hours.
The central bank is expected to lower rates at this meeting, and investors are closely monitoring policymakers’ future interest rate projections.
“The Fed will cut this week by 25bp. But will likely pause at the January meeting. It’s not just the inflation data, it’s the unknowns coming from the beginning of the Trump administration post the 20th January inauguration,” ING Bank said in a note.
Attribution: Reuters
Subediting: M. S. Salama