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The Indian rupee fell below 84-per-dollar for the first time on Friday, pressured by concerns over the recent jump in oil prices and the exodus of foreign money from the domestic equity market.
The rupee dropped to 84.07 and was last quoted at 84.0425 (22.8998 against the UAE dirham) as of 12.20pm IST (10.50am UAE time). The currency's decline past the 84 handle is significant as the Reserve Bank of India had been defending that level for over two months.
The currency had recovered to around 83.50 a little over two weeks ago, but its near-term outlook has worsened as the Middle East conflict has pushed up oil prices, foreigners have been pulling money out of equities and as hopes of another large U.S. rate cut have diminished.
Overseas investors have turned heavy sellers of Indian equities over the last nine sessions, while Brent crude oil futures are up more than 10 per cent in October so far.
Repeated interventions by the RBI over the last two months had helped the rupee hold above the 84 level. The RBI on Monday informally instructed banks to avoid heavy bets against the rupee.
The currency has also been on the defensive due to India's shrinking balance of payments surplus amid a rise in merchandise trade deficit.
A pick up in gold imports alongside a slowdown in exports drove India's merchandise trade deficit to 10-month high of almost $23 billion in August.
And a closely-watched consumer price index reflected a marginally higher inflation rate in September than economists had forecast.
The trade gap also contributed to a widening in the country's current account deficit to $9.7 billion or 1.1 per cent of GDP in the April-June quarter, from a deficit of $8.9 billion last year.
The deteriorating situation contributed to the rupee mostly being a bystander during the rally in other Asian currencies. The rupee's regional peers have risen by 0.3 per cent to 4.9 per cent over the last two months, while it has remained nearly flat.
Meanwhile, the likelihood of the Fed cutting rates by 50 basis points in November have been priced out following a strong jobs report last week, with most bets now on a 25 bps cut.
Going ahead, the rupee could see some more pressure but the RBI may "only allow marginal depreciation to make sure the rupee acts as a stable currency," said VRC Reddy, treasury head at Karur Vysya Bank.
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