Rupee fall sharpest since 2013 taper tantrum after China devalues yuan

The rupee closed at 70.73 a dollar, the sharpest fall in percentage terms since September 2013 when the taper tantrum sent EM currencies in a tizzy

The rupee fell 1.6 per cent against the US dollar on Monday, along with other emerging market (EM) currencies and those in Asia after China devalued the yuan to 2008 lows. The government’s move to repeal Article 370 and create two separate Union Territories out of Jammu and Kashmir also weighed on the sentiment.

The rupee closed at 70.73 a dollar, the sharpest fall in percentage terms since September 2013 when the taper tantrum sent EM currencies in a tizzy. The currency closed at 69.60 a dollar on Friday.

In response to US’s additional tariff imposition, China let the yuan fall 1.5 per cent to cross the 7/dollar-level.

Asian countries fell to keep up with the competitive advantage. But, the rupee’s fall was the sharpest in the region, followed by the Korean won’s 1.46 per cent and the Philippine peso’s 0.84 per cent.

Year-to-date, the rupee has fallen 1.37 per cent.

The currencies fell, even as the US dollar depreciated against major currencies. The dollar index fell to 97.64, from its previous close of 98.07.

Clearly, there is a renewed fear of currency war between countries, even as the member countries of the International Monetary Fund (IMF) have signed a binding agreement among themselves not to engage in currency war. This is when the US-China trade negotiation is heading nowhere.

In an interview with Business Standard, RBI Governor Shaktikanta Das said increased communication between central banks also reduced the possibility of a trade war substantially.

“We believe that there is little incentive for China to keep a relatively strong currency, especially as the Chinese and global economy are softening. However, we don’t believe that the yuan’s weakening is an attempt to weaponise the currency to fight a trade war,” said B Prasanna, group head, global markets at ICICI Bank.

“As far as the rupee is concerned, the broader direction will be dictated by the yuan in the near term. However, we don’t see any large tail-risk for the rupee as the overall outlook on balance of payments remains constructive,” said Prasanna.

However, it is unlikely that the rupee will rebound from its present level, considering the consensus is that the yuan can depreciate by another 3-5 per cent to counter the US tariff, according to Ritesh Bhansali, vice-president, Mecklai Financial.

“The risk-off mood will continue to stay for some time now,” said Rahul Gupta, currency research head, Emkay Global Financial Services, as the rupee crossed the major technical resistance of 70.20 from its 200-day simple moving average.

Currency dealers say the RBI intervened in the market to stem a sharp rupee fall, but not

aggressively.