Rupee Falls To 82.73 Per Dollar As China's Yuan Plunges To A New Low

The rupee reversed gains from earlier in the session on Tuesday to end slightly lower against a softer dollar as the Chinese yuan hit a 15-year low on concerns that with Xi Jinping's new leadership team stacked with his loyalists, China would prioritise the state more than the private sector.

While the domestic currency gained initially driven by an easing dollar on less hawkish US central bank bets, the rupee's appeal was limited in a holiday-shortened trading week after the Chinese yuan fell.

Bloomberg showed the rupee was last changing hands at around 82.73 per dollar after opening at 82.65, compared to its previous close of 82.6850 on Friday.

Last week, driven by aggressive monetary tightening agenda concerns, the rupee hit a new record low, dropping to 83.29 per dollar. However, the Reserve Bank of India stepped in to stop the bleeding and bring the rupee back below the 83-mark.

Indian financial markets were closed on Monday and will be shut on Wednesday for Diwali celebrations and, as such, could limit capital inflows in thin trade.

The rupee moved in a range of 82.58 to 82.79 during the day when volumes were low due to holidays in many parts of India, and Asian currencies were down against the dollar," said Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors.

"The dollar index was at 112.01, almost unchanged, and oil was also steady. The only change was in the Chinese yuan, which almost touched 7.36 levels, keeping the rupee weaker," he added. 

The offshore yuan fell to a new low of 7.3650 to the dollar after the People's Bank of China's daily fix sparked expectations that the central bank could permit a market-determined exchange rate, and mainland stocks found it difficult to maintain stability.

"Conflict between Beijing's security and economic (growth) objectives have been rendered starker," Vishnu Varathan, Head of Economics at Mizuho Bank in Singapore, told Reuters.

"A clean sweep of the Politburo Standing Committee by Xi loyalists, and a conspicuous absence of technocrats likely to be more focussed on firing up the economy, suggests that economic revival policies may be subordinated," he added.

The Hang Seng was last down 0.1 per cent, indicating that Asia-wide weakness in the yuan and China's outlook is spreading.

The South Korean won fell to a 13-year low on Tuesday. The previously sturdy rupiah of Indonesia has lost its lustre, while the Vietnamese dong is falling despite the second 100 basis point rate hike in a month.

According to a Bloomberg gauge, the yuan also dropped to its lowest level in more than a year when measured against a basket of its trading partners' currencies.

The authorities are allowing the yuan to adjust after trying to cap it during the Party Congress," and the question is how far will it let the yuan go, Khoon Goh, Head of Asia Research at Australia & New Zealand Banking Group, told Bloomberg, "a weaker yuan will have some spillover impact on other Asian currencies."

The dollar was somewhat weaker, and the euro was strong ahead of the anticipated rate hike by the European Central Bank later this week.

Sterling also received some support from expectations that the new prime minister, Rishi Sunak, will bring stability.

After Rishi Sunak easily won the contest for Conservative Party leadership on Monday, the price of gilts rose. 

"While the premium associated with September's reckless fiscal policy actions may have been removed, that does not take us back to a neutral view on sterling," Adam Cole, Chief Currency Strategist at RBC Capital Markets, told Reuters.

"The UK's structural imbalances existed before those policy changes, and they are still a longer-term concern," he added.