Rupee stays on crash course; stocks snap losing streak

Currency breaches 65-a-$ mark in intra-day trade; Sensex up 2.27%

The rupee, which slipped under the 65-a-dollar mark in intra-day trade, hit a new all-time closing low for a sixth straight trading session on Thursday, as the US Federal Reserve minutes, released late Wednesday night, hinted that country was on course to start tapering its bond-purchase programme as early as next month.

But the equity markets, which ended their four-day losing streak, gave some reason to policymakers to frown a tad less. The BSE benchmark Sensex ended up 2.27 per cent, despite continued selling by foreign institutions. The bounce-back came on value buying and was aided by improved manufacturing data from China. The BSE Metal index, which rose 8.23 per cent, was the top gainer, on hopes of improved demand.

In the currency market, month-end dollar demand from importers and selling by FIIs added to the woes, though dollar sale by state-run banks (on behalf of the Reserve Bank of India) and exporters helped the rupee recoup some of its losses. The Indian currency, still, ended at a new all-time closing low of 64.63 a dollar on Thursday after opening at 64.82.

Since the start of this financial year, the rupee has weakened by over 20 per cent, while in August alone it has fallen more than eight per cent so far.

In its annual report, RBI warned full pass-through of the rupee’s fall had yet to take place and that would put further pressure on prices. “The pass-through of the depreciation of the rupee exchange rate by about 11 per cent in the first four months of 2013-14 is incomplete and will put upward pressure, as it continues to feed through to domestic prices,” RBI said.

“Given that Indian equities had been oversold, and with European bourses rising, the Indian stocks got an uplift and the broad indices clocked gains of two per cent. The expectation that the government might lift the ban on mining boosted banking shares. The rupee’s weakness had little impact on the equity markets today,” said Anindya Banerjee, currency analyst, Kotak Securities.

Currency dealers are expecting the rupee to weaken further, unless the government announces some concrete measures. Despite RBI taking various measures to curb volatility, the currency had on Wednesday weakened 151 paise against the dollar during intra-day trade.

“What is worrying policymakers at this point is not the rupee’s actual level but the pace at which it has depreciated. The level of the rupee is consistent with India’s weak fundamentals. Going forward, for stabilisation of the currency, we need consistent long-term structural reforms, which would revive investment climate,” said Bank of Baroda Chief Economist Rupa Rege-Nitsure.

Ratings agency Fitch warned that the governments of India and Indonesia, facing a crisis of confidence among investors, needed to halt the slide in perception. It also warned of a possible downgrade. India’s credit rating is a notch above junk grade.

“Rapid private sector credit growth, widening fiscal deficits or sustained higher inflation could lead to a broader and more sustained loss of confidence among investors,” Fitch said in a statement on India and Indonesia. “This could potentially undermine economic and financial stability, and ultimately lead to negative rating action,” it added.

Month-end dollar demand is expected to increase in the next few days. So, currency dealers see the rupee weakening further in the near term.

Government bond yields softened on Thursday on value buying. The yield on the 10-year benchmark government bond ended at 8.23 per cent, compared with 8.41 per cent the previous day.

In equities, indices tracking the information technology, oil & gas and the healthcare sectors performed well. Interestingly, the rise in the markets came despite foreign institutional investors, spooked by the rupee falling to a fresh all-time low, selling shares worth Rs 1,277.64 crore on Thursday. Domestic institutions were net buyers to the tune of Rs 389.66 crore, according to provisional exchange figures.