Here are five things to know to about rupee's decline:
1) US retail sales rose the most in seven months in July as consumers spent more on 10 of 13 retails sectors. Further, upward revisions to sales for both May and June countered concerns that consumption had entered a downtrend and lifted the outlook for economic growth. Investors reacted by narrowing odds on the Fed tightening again this year and sent two-year Treasury yields up to 1.36 percent, from 1.29 percent on Friday.
2) Foreign investors, who have been a major contributor to the stock market rally this year so far, have turned net sellers of Indian equities this month so far. They have sold shares worth nearly Rs 4,300 crore in August. Geo-political concerns have impacted global equity markets and also hit foreign inflows into emerging markets.
3) After surging nearly 7 per cent against the dollar this year, the rupee has witnessed some selloff this month as investors rushed to buy safe heaven assets like dollar and gold on geopolitical tensions.
4) Meanwhile, a report by news agency Reuters said the Reserve Bank of India (RBI) will likely have to drain up to $22 billion in excess liquidity from the financial system as surging foreign investments forces the central bank to absorb the dollar inflows and sell rupees to cap gains in the rupee.
5) "The rupee will largely be guided by foreign portfolio investment (FPI) movements in short run which will also affect the stock market. Debt limits of FPIs are being reached while equity flows are whimsical. Hence volatility will continue for next couple of months before the rupee declines on a permanent basis towards the 65-65.5 mark. From there on the trade numbers will matter a lot," said Madan Sabnavis, chief economist at Care Ratings.
(With Agency Inputs)