Rupee depreciates sharply reacting to Fed rate increase

The Indian rupee on Thursday plunged sharply against U.S. dollar following the US Fed increasing rates by 75 bps and hinting at more rate increases in the future. The rupee closed at 80.79, down, down 83 paise from Wednesday.

“. Post super hawkish Fed and sell-off in equity markets, there was significant unwinding of shorts in dollar. Central bank seems to have not intervened aggressively.,” said Anindya Banerjee, vice president, Currency Derivatives & Interest Rates Derivatives, Kotak Securities Ltd.

“However, in the coming sessions, we expect RBI to step in and contain volatility. Therefore, the range of 80.40 and 81.20 can be seen,” he said.

“We believe the dollar index can see a significant increase, implying most major market currencies, including rupee should be under pressure. If we start seeing rupee depreciating, then from a U.S. dollar returns perspective for FPIs, India becomes unattractive,” said Naveen Kulkarni, chief investment officer, Axis Securities Portfolio Management Services.  

“We could also witness a reversal of FPI flows in the near to medium term, which will increase market volatility. Higher interest rates in the U.S. will force major central banks, including India, to increase interest rates to stem the pressure on their domestic currencies and with increased interest rates and cost of capital, market multiples can contract. We believe, in the near term, Indian equity markets can witness increased volatility,” he said.