Rupee weakens to 13-month low

Selling by FIIs, traders, with nervousness on US Fed meet add to fall

Ahead of the outcome of the two-day US Federal Reserve meeting, the rupee slumped to a 13-month low on Tuesday, due to selling pressure by foreign institutional investors (FIIs) in their domestic portfolios. Tracking weakness in the rupee, government bond yields rose sharply.

The rupee would have touched 64 to the dollar if the Reserve Bank of India (RBI), through state-run banks, had not intervened. It ended at 63.54, compared with Monday’s close of 62.95. It had opened at 63.25 and during intra-day trade, touched a low of 63.59. The rupee had ended at 63.70 on November 12, 2013.

“Global equities markets are under pressure, amid rising concerns about the global economy. Emerging market currencies have depreciated against the dollar over the past few days and have weighed on sentiment. FIIs have exited from the domestic equity and debt markets over the past few days,” said Suresh Nair, director, Admisi Forex India.

According to data from the Securities and Exchange Board of India, FIIs sold $210 million on Monday, of which $146.5 million was in debt and the rest was in equity.

“Custodian banks were buying dollars, maybe due to FIIs pulling out. The rupee’s broad range for this month is 63-64 a dollar. It will be under pressure because defence-related payments and month-end dollar demand from importers still has to be covered,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

The trade deficit for November was the highest since May 2013, as gold imports rose almost sevenfold, a government report showed on Monday.

Since the start of 2014, the rupee has weakened by nearly three per cent. Tracking this weakness and selling pressure by traders and FIIs, government bond yields ended at a level close to what was earlier seen at the start of this month, before RBI’s fifth bi-monthly monetary policy review. The yield on the 10-year benchmark bond rose 16 basis points (bps), to end at 7.99 per cent.

“Bond yields rose due to a combination of factors. The rupee is weakening, due to which it is most likely FIIs could be selling their bond holdings. When the rupee depreciates sharply, these FIIs tend to lose out. Besides, the US Fed meeting is on and there is caution ahead of that. Also, profit booking by traders resulted in yields rising,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund. “If the selling pressure continues, bond yields could move up by another five to 10 bps. But at those levels, some buying interest will come in, provided the rupee becomes stable.”

The US Fed’s policy meet will conclude on Wednesday. There are concerns that it might start raising interest rates sooner than expected.