Rupee declines past 86 mark vs dollar for first time on resilient US economy, weak inflows

MUMBAI - The Indian rupee dropped past 86 per U.S. dollar for the first time ever on Monday following a blowout U.S. jobs report that compounded the pressure from weak inflows and higher hedging activity.

The rupee declined 0.4% to a lifetime low of 86.3900 per dollar, tracking the weakness in Asian currencies following nonfarm payrolls data that pointed to a healthy U.S. labour market.

That followed a report showing an upward surprise on a services and manufacturing gauge, all of which paint a picture of U.S. economic resilience.

Weak portfolio flows are compounding the pressure on the rupee. Foreign investors have taken out more than $4 billion from Indian equities so far this month, having withdrawn nearly $11 billion last quarter.

Foreigners turning sour on their India portfolios and the uncertainty over Trump's planned policies have prompted speculators to pile on bearish bets on the rupee and increase their hedging activity.

PERSISTENT WEAKNESS

The rupee has been in a downward spiral for over three months, while its volatility gauges have kicked higher.

The momentum "is pretty clear", said Brad Bechtel, global head of foreign exchange at Jefferies.

The rupee's continued decline "probably makes a lot of sense" and, considering its REER (real effective exchange rate), it makes all the more sense, he said.

The rupee's 40-currency trade REER indicated that the rupee is the most overvalued in at least twenty years.

That, alongside a change in leadership at India's central bank, has fuelled expectations of a more flexible exchange rate policy.

Jefferies' Bechtel expects the rupee to weaken to 88 in the "near-to-medium" term. ANZ Bank expects that to happen by March.

"The loss of the rupee's competitiveness (based on the high REER) has become a pressing issue ... and the moderating business cycle warrants a weaker currency, ANZ said in a note last week.