The Indian rupee fell nearly a percent in trade on March 30 as the dollar strengthened and U.S. bond yields rose.
The Indian unit fell 1.2% to close at 73.38 against the U.S. dollar. The fall—the steepest one-day drop since Feb. 26—took the rupee down to its weakest levels in a month.
The immediate reason for the fall was a strengthening dollar and rising bond yields. The U.S. dollar index rose to above 93 in Asian trade while the 10-year U.S. yield rose to above 1.7%. This pulled down currencies across the region but the Indian unit saw the steepest fall.
While the broad U.S. dollar strength has hit almost all emerging market currencies, a confluence of internal factors exaggerated the move in the rupee, said Madhavi Arora, lead economist at Emkay Global.
A reversal in flows that came in for a string of initial public offerings along with technical factors linked to the end of the fiscal year have played a role in the sharp fall, she said. “Just as the Indian rupee's artificial relative uptick in mid-March was transient, we think the sharp relative depreciation is more a reflection of a reversal of those transient factors than anything structural at play.”
Month-end exporter selling and financial year-end related inflows could cap the fall in the rupee, said IFA Global Research in a note on March 30. However, potential for any significant strength will also be capped given the concerns about the overvaluation of the rupee and the implications of the fiscal year-end exchange rate from a mark-to-market perspective, IFA Global said.
Arora said policymakers are more tolerant towards the idea of a “structurally weaker rupee” in the medium term and the Indian currency is likely to perform in line with Asian currencies in the current year.
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