MUMBAI: The rupee fell to a two-week low on Tuesday, pressured by a weaker yuan and a recovery in the dollar index. It closed at 86.27 against the US dollar, down from 85.84 on Monday. In two sessions, the rupee has declined by 103 paise.
Bankers said corporate demand for the dollar rose on Tuesday even as the equity markets saw a recovery. Also, the year-end dollar supply, triggered by banks transferring forex from overseas to bolster local liquidity, had ended.
“The rupee has come under pressure, partly due to a recovery in the dollar index and largely because of the sharp depreciation of the Chinese yuan by the authorities in response to US tariffs,” said KN Dey, a forex consultant, who advises corporates on forex strategy.
“While the dollar has gained more than one rupee in two days, it is unlikely to test the all-time low of 87.95. The earlier weakness in the rupee was driven by a rise in the dollar index, but it is unlikely that the index will return to those levels. However, in the event of a geopolitical crisis, all bets are off,” said Dey.
The depreciation of the yuan is seen as part of China’s retaliatory measures against the imposition of tariffs by the United States. Given the competitive pressures, a decline in the yuan would force the RBI to allow the rupee to weaken.
The rupee hit a session low of 86.29, the weakest since March 21. The Chinese onshore yuan fell 0.4% to 7.33 against the US dollar after China’s central bank set the midpoint at its weakest since Sept 2023. The yuan trades within a 2% band around this midpoint. The yuan’s weakness exerted pressure on other Asian currencies, with the Indonesian rupiah hitting a record low as traders returned from a break. Regional currency weakness weighed on the rupee. A trader at a state-run bank confirmed strong importer hedging demand, particularly near the session’s close. Dealers expect that volatility in the forex market would restrain RBI from going all out with taking measures to improve liquidity in the forex market.