Choppy times ahead for rupee

The rupee plunged below 75 against the dollar for the first time in eight months on Monday as investors worried over the likely economic fallout of several states considering lockdown restrictions and a strong dollar globally. Analysts believe volatility is ahead for the rupee, with more states joining localised lockdown to contain the Covid-19 second wave. This was the sixth straight session of loss for the rupee, during which it has depreciated by 193 paise.

At the interbank forex market, the rupee closed at 75.05 against the dollar after trading in the 74.7875.14 range, down 32 paise.

Adding to the panic was the Reserve Bank's policy of providing more and more liquidity to the system through the government securities acquisition programme, under which it will purchase Rs 1 lakh crore worth bonds from the market. GSAP, though positive for the bond market (where yields have softened by 5-8 basis points) is not so for the currency. There is now excess liquidity of Rs 7 lakh crore in the reverse repo basket and there will be an infusion of Rs 25,000 crore on the 15th of this month. Such high liquidity means interest rates will remain low. The problem is, the US 10-year yield is now at 1.66 per cent, while Indian bonds are being driven down. This makes India less attractive for investors.

"Choppy times are ahead for the rupee, which was definitely not expected as the liquidity dimension added by the RBI and the commentary provided have spooked the market,” said Madan Sabnavis, chief economist at Care Ratings.