The rupee lost further ground against the dollar on Wednesday, hitting a historic low of 68.825, the worst single-day fall since the currency was partially freed in 1993. At these levels, the currency may have triggered a vicious cycle where its free fall could fuel further dollar outflows.
Wednesday's fall of 3.85% came on the back of a fall in equities and currencies across geographies on concerns of military action in Syria and growing anxiety about the possible portfolio outflows from Emerging Markets (EM) following the tapering by the US Federal Reserves of its QE programme. Domestic concerns such as the fiscal costs of the Food Security Bill also weighed on the currency.
Given the emerging geopolitical concerns as US and the UK get ready to launch military attack on Syria, a flight of dollars from emerging markets could only intensify, dealers said. FIIs have been net sellers in equities of $1 billion over the past seven trading sessions. Portfolio flows have otherwise been a strong source of capital flows for the country.
Dealers believe this is worrisome given FIIs have been hit with the depreciation in the currency eroding the value of their investments. The 30-share Sensex has fallen 7% over the last fortnight to 17996. 15 on Wednesday, while the rupee has weakened by a steep 11% which means FIIs investments would have lost about 18% in value in this period.
FII outflows could be on account of a negative view on the equities and currency, investor redemptions or stop losses being hit, Brijen Puri, head of forex trading at JPMorgan pointed out.
Given the spike in bond yields the benchmark yield was 8.96% on Wednesday flows into the debt market, however, have been uneven. Although they remain by and large sellers, FII money has trickled in on the odd day.
Since May 22, 2013, when the world got the first hint of the Federal Reserves intentions to taper its $85-billion-a-month bond purchases, FIIs have pulled out a massive $12.9 billion from the debt and equity markets $10 billion from the bond market and $2.9 from the equity market. This flight of dollars comes on the back of concerns that the possibility of an early taper in September could leave investors with less dollars to invest in EM assets.
The prospects of military action, on Syria by the US, following chemical weapon attacks on civilians by