Rupee crashes to all-time low of 73.81 on capital outflows, rising oil prices

Mumbai: The rupee on Thursday crashed to a historic low of 73.81 to the dollar due to the twin-impact of capital outflows triggered by surging US Treasury yields and crude oil prices racing to a four-year high.

The domestic currency closed at a record low of 73.58, down by 24 paise or 0.33 per cent, marking its third straight session of losses. The rupee has lost 110 paise or 1.51 per cent in the three sessions since Monday largely due to strong demand dollar demand from oil importers amid firming oil prices and foreign capital outflows.

The US dollar strengthened against global peers after economic data signalled a thriving US economy which drove Treasury yields to a seven-year high of 3.23 per cent - a level not seen since mid-2011. Hawkish comments about the US economy by Federal Reserve Chairman Jerome Powell have also boosted the dollar buying.

Emerging currencies including the rupee bore the brunt during the day as investors shifted funds from riskier assets to safe bets like the US dollar. The dollar strengthened against the Chinese yuan by 0.2 per cent to 6.9 in the offshore market and touched a fresh 20-year high against the Indonesian rupiah. South African rand, Mexican peso and Australian dollar also dropped up to 1.5 per cent.

Brent crude also breached the four-year high of USD 86 dollar per barrel level, fuelling worries over widening current account and trade deficit. Oil prices have reached four-year peaks as the market focused on upcoming US sanctions on Iran while shrugging off the year's largest weekly build in US crude stockpiles.

"The fall in the rupee led to a sharp rise in government bond yields, due to increasing expectations that the RBI's monetary policy committee (MPC) could go for a bigger rate increase than expected on Friday," V K Sharma, Head PCG & Capital Markets Group HDFC Securities. India's benchmark 10-year sovereign yield rose to 8.16 per cent. Stocks markets crashed up to 2.24 per cent due to heavy selling pressure banking, energy, pharma and IT stocks.

Foreign investors remained net sellers for a third day pulling out Rs 2,760.63 crore from stock markets. To stem the rupee fall, the RBI Wednesday allowed oil companies to access foreign capital of USD 10 billion on a long-term basis to finance their working capital requirements.

The government Thursday said state-owned fuel retailers will have to complete USD 10 billion external commercial borrowing (ECBs) within a year and they would not be required to hedge the exposure. The central government and mostly BJP-led states announced a cut in excise and VAT rates to reduce fuel prices by Rs 5 per litre.

The rupee opened on a weak note at 73.72 against the previous close of 73.34 per dollar. It slid to an all-time low of 73.81 per dollar due to rising crude prices and reports that the RBI "cannot afford" a special swap window for oil importers to meet the dollar demand.

Bank of America Merrill Lynch in a report explained that pre-committing USD 8 billion a month for it over and above the USD 25-30 billion lost in interventions since April will push the overall forex reserves below the critical eight-month import cover mark.

The rupee, however, made a spirited recovery of 23 paise from lifetime lows in last 15 minutes of trade backed by the government steps to reduce oil prices. It finally settled at 73.58, it all-time closing low, with a loss of 24 paise. The FBIL set the reference rate at 73.7509 for the US dollar and 84.6257 for the euro. The pound sterling was pegged at 95.3904 and Japanese yen at 64.49 for 100 rupees.