India's currency fell Wednesday to its lowest-ever level against the USA dollar.
The Reserve Bank of India (RBI) held interest rates unchanged at a policy meeting on Friday, sending the rupee tumbling to a record low and stunning analysts who had expected a rate increase to combat inflationary pressures arising from high oil prices.
The dollar rose to near 1-month highs against global currencies.
Mr Khoon Goh, head of Asia research at ANZ Banking Group in Singapore, said the mix of strong USA data and the Fed chair's comments bumped up the dollar and United States bond yields, putting downward pressure on Asian currencies.
Emerging currencies including the rupee bore the brunt during the day as investors shifted funds from riskier assets to safe bets like the U.S. dollar.
The Indonesian rupiah continued to decline, falling as much as 0.7 per cent versus the dollar and at its weakest in more than 20 years.
Surging crude oil prices fueling concerns on widening of current account deficit and capital outflows dragged the currency lower, say analysts.
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Analysts attribute the collapsing of the rupee to the weak global trade sentiment, rising crude oil prices and higher demand for the US dollars.
She said: "For bond markets, a 25 bps hike accompanied by a hawkish stance could trigger the 10-year bond yield to rise to 8.25 percent".
Stocks markets crashed up to 2.24% due to heavy selling pressure banking, energy, pharma and IT stocks.
On Wednesday, foreign investors have withdrawn 1,550 crore from Indian capital markets, according to the provisional exchange data.
The trade deficit was at a five-year high of Dollars 18.02 billion in July. On Monday, INR had closed at 72.91 per dollar. Higher crude oil prices, demand from defence and oil marketing firms have contributed to the latest bout of weakness.
Bank of America Merrill Lynch in a report explained that pre-committing Dollars 8 billion a month for it over and above the USD 25-30 billion lost in interventions since April will push the overall forex reserves below the critical eight-month import cover mark. The pound sterling was pegged at 95.3904 and Japanese yen at 64.49 for 100 rupees.