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How the Chinese market turmoil has impacted the Indian Rupee

28 Oct 2015 |By: Team Finalaya

How the Chinese market turmoil has impacted the Indian Rupee

The Greek crisis was hardly behind us when the Chinese stock market suddenly went through a roller coaster. The impact was so huge that it wiped out billions of dollars in investor wealth across the globe and even the New York Stock Exchange had to halt trading temporarily, though for a short while.

Read More - US markets slip on weak Chinese data

Indian Rupee was resilient through most part of this turbulence. The rupee opened at 64.01 for August and remained bullish during early August. The Reserve Bank of India, yet again refused to tinker with the interest rates and the monetary policy remained unchanged. However, it also indicated that debt limit for foreign investment could be set in Rupee terms than US Dollars, pushing the Indian currency to 63.85. The rupee strengthened further to 63.72 riding piggy back on large corporate inflows.

But, the non-farm payrolls in the US kept improving and that in turn brought the rupee back to the 64.0 levels. China devaluing the Yuan impacted the Indian currency bringing about another 1.9% weakness and the rupee fell to 64.55 breaking its key resistance level of 64.30. With China devaluing her currency further by 1.6% importers triggered a panic demand for dollars and coupled with weak global financial markets, the rupee lost further ground hitting the 65.0 levels.  At that level, it also encouraged importers to trigger stop loss limits pushing the Indian currency further down to 65.30.

From here, the rupee remained under pressure on concerns of another round of devaluation of the Chinese currency and a consequent sell off in the Chinese equity market. Exporters on the other hand held on to their Dollars and the Rupee could only move in one direction – down south.

If all these were not enough for the Rupee, $6 billion were needed by Indian oil importers to pay off Iran. This came as the proverbial last straw on the camel’s back and the Rupee plunged to 66.40.

Global equities faced a huge sell off and US equities continued their losing streak. The Indian stock market was no exception and it suffered the worst crash for a single day, ever since the financial meltdown of 2008/09. But at this stage, the Rupee had depreciated enough and therefore the impact was limited to less than 50 paise taking the Rupee to 66.76. The RBI intervened at this stage to stem the rot and that helped the Indian currency back to the 66.50 levels. The appreciation was not huge, but what is important is that it prevented a further fall.

Next came in the rate cut by the Chinese central bank followed by huge funds injected into its banking system creating some semblance of positivity in financial markets across the globe. The rupee moved marginally to 66.20 and that also triggered stop loss selling of Dollars by exporters pushing the Rupee up to 65.85. Local equities too recovered from the steep fall to stabilize at lower levels. The Indian market was optimistic that a rate cut by the RBI might have helped the rupee to some extent. However, rate hike prospects by the US Fed has caused zigzag movements in both currency and stock markets for some time now. This factor of uncertainty is expected to hang around for the rest of the year and in all likelihood the Fed may go for an interest rate hike only early in 2016.

It is important to note that the Rupee has weathered the global storm fairly well and even in the last week of October, it is hovering around the 65 levels.

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