Russian currency Rouble plunged more than 30% to a record low against the US dollar on Monday as western nations imposed strict sanctions on Moscow for invading Ukraine, Reuters reported.
As markets opened for the day, the Rouble was trading as low as 119 per US dollar. Around noon, the currency was down 28.77% at 118 from its closing price of 83.64 on Friday, according to The Guardian.
In an attempt to salvage the currency, Russia’s central bank more than doubled the country’s key interest rate from 9.5% to 20% on Monday. Higher interest rates offer lenders a greater return relative to other countries. So typically, higher interest rates attract foreign capital and results in a rise in exchange rate of currencies.
“An increase in the key rate will make it possible to ensure an increase in deposit rates to the levels necessary to compensate for the increased devaluation and inflation risks,” the Bank of Russia said in a statement.
However, under the prevailing circumstances, it cannot be said for sure if hiking interest rates would address the problem of depreciation of the Rouble. Russia’s invasion of Ukraine and the sanctions imposed by western countries on Moscow as a retaliatory move mean that the situation is more dynamic than normal.
Over the weekend, the United States, the United Kingdom and many European Union countries, including France, Germany and Italy, had decided to cut off some Russian banks from the Society for Worldwide Interbank Financial Telecommunication, or Swift, a global interbank payments system.
Swift is a secure platform used by financial institutions to exchange information about global monetary transactions. The system operates as a platform to verify transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries.
Market experts expected a steep drop in the Russian currency in the next few days.
Bipan Rai, a senior macro strategist at financial services firm CIBC Capital Markets, said that Rouble has lost “pretty much all value” outside Russia, CNBC reported.
“Russia’s central bank would probably have to hike interest rates very aggressively and sell gold,” he said. “To me, it doesn’t really feel like we are looking at or at least we are going to see the bottom in the rouble here. I think there still is plenty more room for weakness to come.”
On February 26, Russia’s central bank had appealed for calm in currency markets amid fears that the new sanctions by US and European nations could have an adverse effect on its banks, according to BBC. The bank had announced several measures including buying gold to support the domestic market.