Rupee Drops Most In Six Years On Mix Of Global, Domestic Triggers

The Indian rupee weakened to an over five-month low on Monday, as the Chinese Yuan traded below 7 against the U.S. dollar for the first time since 2008 and tensions over Kashmir added to nervousness in the market.

The rupee opened at 70.28 to the dollar and weakened through the trading session. It closed 1.6 percent weaker at 70.73 to the dollar.

A pick-up in trade tensions between U.S. and China could mean weakness for emerging market currencies, said K. Harihar, treasurer at First Rand Bank. The rupee could trade between 70-71/$, he said.

The Indian rupee was the worst performer in Asia but most regional currencies depreciated in trade. The offshore Chinese Renminbi fell 1.49 percent, while the Korean Won fell 1.4 percent.

The move by the People's Bank of China to set the yuan fixing weaker than 6.9 a dollar for the first time suggests policy makers may be willing to use the Yuan as a weapon in the trade war, Bloomberg News reported quoting market analysts.

In addition to global factors, a continued foreign outflow from the Indian equity markets has also led to some weakness in the rupee.

Foreign investors have sold nearly Rs 15,000 crore in domestic equities between July and August. While the debt markets saw inflows between May-July, some selling has picked up in the first few days of August. The Indian government's decision to Article 370 which governs the Jammu and Kashmir region added concerns of geo-political tensions to already existing fears of a slowdown in the Indian economy.

The rupee is facing the wrath of domestic and international markets, said Madhavi Arora, economist at Edelweiss. On the domestic front, geopolitican tensions and foreign outflows have led to the fall in the rupee, Arora said. In times of global risk aversion, markets tend to be wary towards emerging economies, she added.