The rupee saw its steepest fall in nearly two months on Thursday as emerging market assets wilted on worries the U.S. Federal Reserve would raise interest rates sooner than expected, although the currency recovered some losses on dollar sales by exporters.
Comments by Fed Chair Janet Yellen on Wednesday indicating the central bank could end its massive bond-buying programme this fall, and could start raising interest rates around six months later, had stunned investors.
The rupee has surged 12 percent since its record low in late August to a seven-month high this month on the back of strong foreign flows that have helped sharply narrow the country's current account deficit, so any reversal of foreign flows could dent the outlook for the currency.
Equities in particular have rallied on the back of expectations that the Bharatiya Janata Party led by prime ministerial candidate Narendra Modi would win elections set to conclude by May, given perceptions of the opposition party as being more business friendly.
"A lot of the rally due to hopes of Modi coming to power is priced in. I am bullish on the global dollar and think the rupee will show weakness on that going ahead," said Abhishek Goenka, chief executive at India Forex Advisors, referring to U.S. yields rising going ahead.
Dealers said exporters who had stayed on the sidelines cashed in to sell dollars around 61.40 levels, the day's low for the rupee.
The partially convertible rupee closed at 61.34/35 per dollar, weaker than Wednesday's close of 60.95/96. It fell 0.6 percent in the session, its biggest single-day loss since January 27.
The Indonesian rupiah led losses among emerging Asian currencies on Thursday, hitting the rupee.
Concerns about foreign flows are now bound to rise after net purchases into Indian stocks and bonds reached $3.6 billion in March alone, taking the total for the year to $7.8 billion.
In the offshore non-deliverable forwards, the one-month contract was at 61.73 while the three-month was at 62.45.
Image: A banker carries rupee notes; Photograph: Reuters