Rupee crumbles to fresh 2-week low on fiscal deficit woes

Mumbai: The Indian rupee suffered an intense plunge and closed at a near two-week low of 64.06 against the US dollar after the government announced long-term capital gains (LTCG) tax on equities and widened its fiscal deficit target while unveiling the Union Budget.

Forex market sentiment turned highly volatile and reacted vehemently to some key Budget announcements triggering panic dollar buying by corporates and importers.

The home currency settled the week with a sharp 51 paise, or 0.80 per cent. Unveiling the Budget 2018-19, Finance Minister Arun Jaitley projected a higher fiscal deficit of 3.5 per cent of the GDP for 2017-18, as against the target of 3.2 per cent.

Besides, the Centre introduced long-term capital gains tax of 10 per cent on stock market gains exceeding Rs 1 lakh and the net borrowing for the current fiscal was also steeply raised to Rs 4.79 lakh crore as against the Budget estimate of Rs 3.5 lakh crore.

It was a double-whammy for the Indian currency following the FOMC announcement hit hard by hawkish Federal Reserve policy and a sudden rise in global crude prices, adding to worries about rates rising too quickly.

The FOMC held interest rates unchanged in line with market expectations but the accompanying statement was a bit more hawkish on the economy and inflation warranting further rate hikes in 2018.

The volatile situation was further aggravated by heavy losses in the domestic equity markets which witnesssed carnage following post-Budget sell-offs amid global crash. Both the benchmark indices pulled back nearly 3 per cent in the bloodbath.

The rupee started the week on a subdued note at 63.60 against last Thursday's close of 63.55 at the Interbank Foreign Exchange (forex) market due to month-end dollar demand amid firm greenback overseas.

It traded in a tight range early part of the week before taking a knock reacting to post announcements of budgetary proposals. The home currency plunged to a fresh one-month low of 64.20 on Thursday before ending at 64.06, showing a loss of 51 paise, or 0.80 per cent.

Though, the rupee touched a high of 63.48 briefly. The RBI, meanwhile fixed the reference rate for the dollar at 64.0781 and for the euro at 80.0335.

In the meantime, country's foreign exchange reserves rose sharply by USD 3 billion to touch a new life-time high of USD 417.789 billion in the week to January 26, the RBI said.

Foreign funds and overseas investors continued their portfolio buying spree and infused USD 248.05 million during the week.

In the international commodity front, global crude prices came under renewed selling pressure against the backdrop of rising oil production in the US, together with firming greenback following a strong US jobs report.

US shale production is soaring as the oil rig count once again ticked up this week, but OPEC's high compliance and the continued crisis in Venezuela has left oil markets at a stand still.

Brent crude futures settled at USD 68.58 a barrel. On the global front, the American currency rose on Friday against a number of currencies including the Japanese yen and the euro after the monthly jobs report surpassed expectations.

US job growth surged in January and wages increased further, recording their largest annual gain in more than 8-1/2 years. The dollar index, which measures the greenback's value against a basket of six major currencies, was up at 88.69 in early trade.

In cross-currency trade, the rupee remained under intense pressure against the Euro and British Pound for the fourth-straight week.

The Indian unit plummted sharply by a staggering 1.15 against the euro to end at 80.02 from 78.87 and tumbled against the pound sterling to finish at 91.12 per pound from 90.63 last weekend, respectively.

The local unit, however rebounded against the Japanese Yen to close at 58.30 per 100 yens from 58.32. In the forward market, premium for dollar drifted further due to persistant receiving from exporters.

The benchmark six-month forward dollar premium payable for June edged down to 119-121 paise from 118-120 paise, while the far-forward contract maturing in December 2018 held steady at 256-258 pase last Friday.