Rupee Sinks To Near 1-Month Low As Markets Crash After US Rating Downgrade

The Indian rupee dropped to nearly a one-month low against the US dollar on Wednesday. The weakness in local currency is due to a surge in the safe-haven dollar which appreciated to 102 against a basket of currencies, fuelled by concerns over Fitch's US credit rating downgrade. The rupee also tracked Asian currencies that dipped by nearly a per cent against the greenback. Apart from this, rising crude oil prices, a spike in bond yields, and a steep selloff in domestic equities soured the mood further in the rupee.

The rupee ranged from 82.6050 to 82.3675 during the trading session.

At the time of writing, the rupee traded at 82.5950 against the US dollar at the forex interbank market, compared to the previous day's print of 82.2725.

The local currency crossed the 82.60 mark against the dollar, a level that was last seen on July 10.

It also needs to be noted that the rupee fell just ahead of the 3-day RBI policy meeting that will take place from August 8th to 10th.

On Tuesday, Fitch Ratings downgraded the United States' long-term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA'. However, the Rating Watch Negative was removed and a 'Stable' outlook was assigned. Meanwhile, the country's ceiling has been affirmed at 'AAA'.

Fitch's rating action was fuelled by expectations of fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA-rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.

However, Reuters reported that analysts did not see a major impact of the downgrade on U.S. Treasuries, which will be a relief for the rupee and other Asian currencies. Goldman Sachs in a note said, "It is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change."

In the early trade of August 2, Brent Crude climbed by 1.1% to $84.98 per barrel, while US West Texas Intermediate (WTI) soared over 1.3% to $82.43 per barrel. Crude oil continues to trade on a higher note.

Meanwhile, the 10-year treasury note zoomed above 4%, while the dollar appreciated breaching over 102.

Notably, foreign institutional investors have been net sellers for four consecutive days now with an outflow of Rs 5,797.37 crore in Indian equities.

IIFL Securities in its currency outlook for today said, "Technically market is under fresh buying as the market has witnessed a gain in open interest by 5.1% to settle at 2243751 while prices are up 0.04 rupees, now USDINR is getting support at 82.28 and below same could see a test of 82.23 levels and resistance is now likely to be seen at 82.37, a move above could see prices testing 82.41."