Weak Yuan, Corporate Outflow Drive Indian Rupee To Record Low

In the wee hours of Thursday morning, the People's Bank of China set its reference rate for yuan at its lowest level since November.

The resultant weakness in Chinese yuan along with corporate outflows and little dollar sales to support the Indian rupee resulted in a staggered decline in the currency to an all-time low of Rs 83.65 per dollar.

The rupee closed at Rs 83.65 per dollar against the US dollar, after registering a low of Rs 83.66 in the latter half of the trading session. On Wednesday, the rupee ended at Rs 83.45 a dollar.

"Dollar index has also strengthened, all Asian currencies weakened," Kunal Sodhani, vice president at Shinhan Bank said. "There were some corporate outflows as well... but if you look at offshore (rupee), it has cooled off to 83.61. I think that outflow is done with."

This is not the first time the rupee has taken cues from the movement in Chinese yuan. However, the weaker fixing by the Chinese central bank on Thursday was perceived as somewhat unceremonious for currency traders back home.

While market players will keep an eye on yuan's movement in the coming days, there is chatter of yuan testing 7.50 a dollar levels, a senior treasury official at a large private bank said on the condition of anonymity.

The dollar/yuan mid-point was set at 7.1192 per dollar, which indicates that the People's Bank of China is willing to let the yuan weaken further to manage pressure on its currency. This pushed onshore as well as offshore yuan to their weakest levels since November. The central bank sets the onshore spot midpoint daily and allows it to trade within a +/- 2% range from that level.

The yuan traded at 7.26 per dollar on Wednesday.

The weakness in yuan spilled over to other Asian currencies as well, currency traders said.

The rupee had been hovering around its earlier record low level of Rs 83.57 a dollar, on account of outflows from domestic equity markets. In 2024 so far, foreign portfolio investors have sold local equities worth $1.4 billion on a net basis, according to National Securities Depository data.

On the other hand, the rupee has been supported by net inflow of foreign funds into debt to the tune of $7.6 billion this year, ahead of India's inclusion in the JPMorgan Emerging Market bond index at the end of June.

Traders remained optimistic of continued support to the rupee from foreign fund inflows in debt market in the coming days. "I don't think the weakness is going to be sustained because we are expecting bond inflows to come in... unless the Asian currencies as a basket come under pressure," Ritesh Bhusari, deputy treasury head at South Indian Bank, said.

Even as the rupee fell to a new record low, some banks sold the greenback seemingly on behalf of Reserve Bank of India to limit further fall in the rupee, traders said.

Exporters, too, were not very active during the day as they were awaiting levels below Rs 83.50 a dollar, they added.

Going forward, currency traders expect the rupee to move in the range of Rs 83.40-83.90 a dollar levels.

"For USD/INR, NDF (non-deliverable forwards) highs of Rs 83.72 may remain the first important resistance to watch out," Sodhani said.