Rupee plunges, yields shoot up on Indo-Pak border tension

Rupee opened at 66.44 a dollar level but was already under some pressure as US dollar strengthened against major global currencies

The rupee plunged and bond yields rose following India’s announcement that it has conducted strategic strikes across the LoC.

The domestic currency lost 0.58 per cent to close at 66.86 a dollar, the biggest intraday fall since Brexit. The local currency had closed at 66.47 a dollar on Wednesday. Rupee reached 66.95 a dollar in the intraday but heavy intervention by the Reserve Bank of India (RBI) prevented it from touching 67 a dollar level, said currency dealers.

According to currency dealers, the central bank intervened frequently to iron out the volatility, but the movement was not unidirectional. The trading session was quite volatile as at every RBI intervention where rupee strengthened, importers started buying the dollar pushing the rupee downward.

RBI sold dollars through nationalised banks at 66.70 a dollar, 66.80, 66.89 and 66.90 a dollar level. Given the sense of uncertainty prevailing, currency dealers are not ready to commit on a level for the rupee in the coming days. However, rupee touching its record low of 68.85 a dollar (recorded on 28 August, 2013) is unlikely to happen unless the situation becomes warlike, which the market is not expecting as of now.

"It completely depends on how the matter gets escalated. If there are follow up events, then rupee will obviously fall, but if the situation remains stable, the local currency will appreciate back," said Aman Mahna, senior forex dealer at First Rand Bank.

Rupee had opened at 66.44 a dollar level but was already under some pressure as the US dollar strengthened against major global currencies. The dollar index, which measures the greenback's strength against major currencies worldwide rose 0.11 per cent to 95.535 points.

Japanese yen recorded the worst loss in Asia, falling 0.798 per cent against the dollar. But among emerging market currencies, rupee was the worst. The Indian rupee's fall of 0.583 per cent was even worse than Pakistan's rupee's loss of 0.51 per cent. In comparison South Korean won fell 0.175 per cent against the dollar.

Similarly, the 10-year bond yields also rose sharply to close at 7.014 per cent, from its previous close of 6.92 per cent following the announcements of surgical strikes. Prices of bonds fall as yields rise.

"This is a sentiment driven market and India is heavily invested by foreign investors. These investors will pull out at any negative news on escalation," said the head of treasury of a foreign bank who did not wish to be named.

"Fundamentally, this is a great position to buy, but we are also waiting to see the situation settle down," said the treasury head.