MUMBAI: India’s rupee headed towards a record low against the dollar Thursday, weakened by the government’s shock currency shake-up and a greenback surge on expectations of a rate hike next month.
The rupee weakened to a three-year low of 68.8425 in morning trade, perilously close to the all-time low of 68.8450 recorded in August 2013. It later touched 68.7425.
India’s currency has been under pressure since Prime Minister Narendra Modi announced earlier this month that the two largest denomination notes would be withdrawn from circulation in a bid to tackle corruption and tax evasion.
The shock move to scrap 1,000 and 500 rupee ($15, $7.50) notes left around 85 per cent of bills worthless and sparked long queues outside banks as worried consumers tried to exchange their old notes for new ones.
The government has said the move will bring billions of unaccounted money into the formal banking system and ultimately boost the economy but GDP is expected to take a hit in the short term.
India’s economy is highly dependent on cash and consumer spending is likely to take a severe hit as people are left without paper currency for their daily transactions.
The uncertainty caused by the shock decision has also led foreign investors to withdraw huge amounts of capital from the Asia’s third-largest economy and put it elsewhere.
The slide in the rupee has sparked speculation that the Reserve Bank of India, the country’s central bank, may intervene to shore up the currency.
“The market is watching whether the central bank prevents the currency from sliding to a new low,” Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd, told Bloomberg News.
“The rupee has been under pressure along with other emerging-market currencies on account of the dollar’s strength,” he added.
Markets are betting that the US Federal Reserve will raise interest rates in December following Donald Trump’s surprise triumph over Hillary Clinton in America’s presidential election.
Analysts expect consumer spending to increase, resulting in a rise in inflation and therefore a move to increase rates.
That would see investors getting a better return on their investments in America, strengthening demand for the dollar and putting further pressure on the rupee. The rupee has shrunk by 2.92 per cent since Trump’s victory, the Press Trust of India reported.