The Indian rupee and bonds sunk after the current-account deficit widened to the most in five years, as an emerging-market rout raises investor scrutiny of countries with worsening balance of payments.
The rupee tumbled as much as 1.2 per cent Monday, the most in a month, to a record low of 72.5587, leading declines among Asia’s emerging-market currencies. The benchmark 10-year bond yield gained 11 basis points to 8.14 per cent, while stocks also declined.
Emerging markets have been roughed up in the past month as contagion fears start to spread following a meltdown in the currencies of Argentina and Turkey. India’s current-account gap widened in the June quarter to $15.8 billion, hurt by higher payments for oil, data released after market hours on Friday show.
“Apart from the dollar strength that’s weighing on the EM currencies, concerns about financing a wider current-account deficit are also hurting the rupee,” said Paresh Nayar, the Mumbai-based head of currency and money markets at FirstRand Ltd. At these levels, it remains to be seen if the RBI would support the currency in a big way, he said.
The current-account shortfall represented 2.4 per cent of gross domestic product, more than January-March’s 1.9 per cent of GDP, according to the Reserve Bank of India. The worst may be yet to come as the crude import bill for the world’s fastest-growing oil user surged 76 per cent in July from a year earlier to $10.2 billion.
The deficit will probably widen to 2.5 per cent of the GDP for the fiscal year amid rising commodity prices and fund outflows, said Dhananjay Sinha, an analyst at Emkay Global Financial Services. He expects the rupee to weaken further to as low as 75 per dollar and sees the benchmark yield reaching 8.40 per cent.
Global funds sold $601 million of India’s bonds this month, more than the combined $459 million that they bought in July and August. Concerns over an oversupply of sovereign bonds had contributed to the selldown earlier this year, and there are little signs of relief.
The government doesn’t see much room to cut its borrowings for the fiscal year, according to people with knowledge of the matter.
The right level for the rupee is 68-70 per dollar, with 72 being “perhaps an outer limit or beyond the reasonable outer limit for depreciation,” Economic Affairs Secretary Subhash Garg told the Economic Times in an interview. “Those operators who are trying to take advantage of this contagion feeling in emerging markets may come to grief later,” he said.