RBI measures fall flat

Market keeps fingers crossed over Fed minutes; Rs slumps to 64.04 a $; Sensex falls 1.9%; investors left poorer by Rs 1 lakh cr

The Reserve Bank of India’s (RBI’s) measures to infuse liquidity and allow banks to reduce their mark-to-market losses failed to cheer the market on Wednesday. A weaker rupee pulled down stocks and exerted pressure on bond yields, over dollar demand and concern that the US might pare stimulus as early as next month, intensifying outflows and leaving the currency vulnerable to a current account deficit.

The Federal Open Market Committee, which published minutes of its July meeting late on Wednesday night, however, offered few clues on tapering of Fed’s bond-purchase programme. The policymakers were “broadly comfortable” with Chairman Ben Bernanke’s plan to start reducing bond buying later this year.

The rupee fell two per cent to a new low of 64.54 a dollar, in spite of what traders said was sporadic central bank intervention in both spot and forward markets. The Indian currency saw sharp volatility against the dollar as it weakened by 151 paise during intra-day trade — much like the volatility last seen on November 24, 1997. (WHODUNNIT?)

The fall in the rupee led to stock markets giving up early gains and ending sharply lower. Key indices rose almost two per cent earlier on Wednesday, led by bank shares, cheering the RBI’s measures the previous day. But investors and traders used the upsides to square off their positions mid-way through the day after the rupee started showing signs of weakness, leading the benchmark indices to fall about 3.6 per cent from the day’s high.

“The worry is that the measures taken by the central bank are seen as incremental and reactive. These are times when people panic and there is a lack of confidence in the market, as well as the economy,” said Nick Paulson-Ellis, CEO of Espirito Santo Securities India.

The four-day carnage in the markets (the Sensex has fallen over 1,400 points in the past four trading sessions) left investors poorer by over Rs 4.35 lakh crore. On Wednesday alone, they suffered a loss of more than Rs 1 lakh crore.

India was recently edged out of the elite global league of stock markets with trillion-dollar market capitalisation; its valuation continues to slip further, with persisting weakness in stocks and rupee values.

“Given India’s current account deficit and other macroeconomic imbalances, the rupee’s depreciation was inevitable and, possibly necessary. What is making life difficult for companies is the speed and high level of volatility. The new normal level of the rupee should settle down somewhere around 65 a dollar,” said Partha Bhattacharya, deputy CEO, Mecklai Financial.

Since the start of this financial year, the rupee has depreciated by 18 per cent. So far in August, it has weakened six per cent against the US currency.

Economists, too, believe the bias is towards a further weakening of the rupee. “The market view is building around an earlier taper. This is causing a faster pace of depreciation in rupee against the dollar,” said YES Bank Chief Economist Subhada Rao.

Government bond yields witnessed a sharp recovery in early trades and the yield on the 10-year benchmark government bond fell to 8.21 per cent in early trades. However, tracking the weakening rupee, yields started rising and closed at 8.41 per cent, compared with the previous close of 8.90 per cent, after touching an intra-day high of 8.47 per cent.

Deutsche Bank said in a note that the rupee could slide to 70 in a month or so, although some revival was expected by the end of the year.