Rupee, markets hit by global volatility

China worries spook emerging markets; oil softens further, gold sees safe-haven buying

Emerging market equities and currencies took a beating on Thursday, owing to yet another sell-off in the Chinese market, heightening concern about the health of the world’s second-largest economy.

Sharp outflows by foreign investors saw the rupee weakening to September 2013 levels against the dollar. It closed at 65.55 a dollar, compared with its previous close of 65.27/dollar. The National Stock Exchange Nifty fell 1.5 per cent, the most in a month, to 8,372.75.

India’s emerging market (EM) counterparts saw much deeper corrections, with the MSCI EM index dropping to a four-year low and some currencies falling to decade-lows.

In recent months, EM equities and currencies have come off sharply due to volatility in the Chinese stock market and the country’s decision to devalue its currency. The rupee is down seven per cent from its high this year, while the Malaysian ringgit and the Indonesian rupiah have declined to levels earlier seen about 15 years ago.

The weakness in currencies and fear of a further slide has made foreign investors jittery, which has resulted in heavy outflows from most emerging markets. On Thursday, foreign investors sold shares worth about Rs 1,000 crore, provisional exchange data showed. In the past three weeks, the Indian market has witnessed bouts of heavy selling by foreign investors, which has put pressure on the rupee.

Experts say there is more pain in store for the rupee. “Though there was intervention by the central bank, it was not very significant. By the next week, the rupee might touch 66/dollar, as month-end dollar demand from importers will emerge,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

To mitigate volatility, the central bank has been intervening in the currency market, which has eaten into forex reserves. Foreign exchange reserves with the Reserve Bank of India (RBI) fell by $113.5 million to $353.35 billion in the week ended August 7. Market players say the pace of intervention has increased in the past week, following an unexpected devaluation of the yuan by China.

Terming devaluation of currencies a worrisome trend, RBI Governor Raghuram Rajan on Thursday said China’s move to devalue its currency and protect its stock markets raised questions about the true strength of the Chinese economy. “I think more generally across the globe, because of weak demand, we have seen significant efforts to depreciate currencies; you could call it monetary policy or direct exchange rate intervention. That’s a worrisome trend,” he said.

According to Rajan, moves such as these, through which countries devalued currencies due to low demand, could lead to a free-for-all at the global stage. The RBI chief, however, added, the rupee had been among the more stable currencies, though it, too, had depreciated.

A few experts say if the depreciation in the rupee continues, a rate cut by RBI is unlikely in September, despite a lower inflation print for July.

On Thursday, banking stocks were among the biggest losers, with Axis Bank falling four per cent and State Bank of India losing three per cent. Shares of commodity companies, including Vedanta, GAIL, Coal India and ONGC, also fell sharply.

Brent crude prices slipped a per cent to six-year-low levels of about $47 a barrel. US West Texas Intermediate (WTI) crude oil slumped four per cent on Wednesday to hit a six-and-a-half-year low, as a huge unexpected stockpile in the US reinforced concern about a growing global oil glut.

On Thursday, global copper prices fell below $5,000 a tonne, the first time in six years. Safe-haven buying saw international gold prices climb to the highest in a month.

The broader market underperformed the benchmarks, with the BSE small- and mid-cap indices declining about two per each. Around 70 stocks in the BSE 500 index fell more than five per cent each.