)
The rupee tumbled to a near-69 level against the dollar on Wednesday over concerns that foreign institutional investors (FIIs) might continue selling stocks in the absence of concrete steps to rein in the current account deficit (CAD). Also fuelling the slide was the fear that a surge in oil prices might push the country’s economy into its biggest crisis in over two decades.
The Reserve Bank of India’s (RBI’s) move to pump dollars into the market helped little, as the Indian currency slid 3.99 per cent — its biggest single-day fall in more than 21 years. In absolute terms, the 256-basis-point fall was the biggest ever for the rupee. After touching an all-time intra-day low of 68.85, it ended at 68.83 a dollar — a decline of 264 paise from Tuesday’s close of 66.19.
On the other hand, stock indices, which had on Wednesday opened lower than their respective previous closing levels, rebounded sharply from the day’s lows to close almost flat. Traders covered their bearish bets on talk that domestic insurers, especially Life Insurance Corporation (LIC), were mopping up shares, specially the battered banking ones, at lower levels. The benchmarks recovered almost three per cent from the day’s lows, thanks to buying in software exporters, which are expected to benefit from the rupee’s weakness. (BUMPY RIDE)
The BSE Sensex, after hitting a low of 17,448.71 during the day, recovered to end the day at 17,996.15 — 28 points, or 0.16 per cent, higher than its previous close. The NSE Nifty gained 2.45 points, or 0.05 per cent, to close at 5,285, after having touched a low of 5,118.85 earlier in the day.
According to provisional data, FIIs on Wednesday sold shares worth Rs 1,120 crore, extending their selling spree to an eighth straight day. Domestic institutions, including mutual funds and insurers, net-bought to the tune of Rs 506 crore.
The government, however, remained in denial over a crisis, with Economic Affairs Secretary Arvind Mayaram calling the rupee’s fall a “reflection of irrational sentiment” and saying there was no need for panic. The Congress party dismissed it as a “global phenomenon”.
Currency market participants said most of the present dollar demand was because of importers’ month-end requirements. But that could extend if FIIs extended their sale of Indian shares, they added.
“The momentum against the rupee is very strong right now. In the current environment, it is very difficult to say at what level the rupee will have a natural full stop,” said Hitendra Dave, MD & head of global markets (India), HSBC. “Any administration fixes, such as a correction in CAD, bringing growth, reviving investment activity, etc, will give benefits, but only in the long term.”
Brokers said FIIs were spooked by the government’s decision to pass the food security Bill in the Lok Sabha on Monday, especially as India’s finances at present were in a precarious state.
“FIIs are really concerned about India after passing of the Bill. They are increasingly getting uncomfortable,” said Motilal Oswal Financial Services CMD Motilal Oswal. The bounce-back in indices on Wednesday came as a relief for investors but most were hesitant to conclude that the worst was over for stocks.
“A stable rupee is a necessary condition for the equity market to bottom out,” said Bharat Iyer, MD & head of research (India), JPMorgan. “For investors with a shorter-term investment horizon, we continue to advocate caution,” he said in a client note.
HSBC’s Dave said the only thing that could work now was market seeing a wall of significantly large dollar supply from some source. “The other thing is authorities opting to intervene in the offshore market, since that is moving very fast overnight,” said Dave.
ALSO READ: Is the rupee really undervalued?
BNP Paribas on Wednesday slashed its forecast on India’s economic growth in the current financial year from 5.2 per cent to 3.7 per cent — the weakest rate since 1991-92, when India was buckling under a balance-of-payments crisis that required a loan from the International Monetary Fund. “India’s Parliament remains toxically dysfunctional, with little, if any, business conducted,” BNP said.
The rupee had on Wednesday opened weak, at 66.91 a dollar, tracking the Non-Deliverable Forward (NDF) market. The one-month offshore NDF is quoting at over 69 a dollar.
Though RBI intervened in the local market heavily by selling dollars through state-run banks, it was not enough to support the rupee’s slump. From the start of this financial year, the rupee has depreciated 25 per cent against the dollar; the weakness has been 14 per cent since the start of this month.
Mecklai Financial Deputy CEO Partha Bhattacharya said RBI should have intervened in the market on Friday.
“On Friday, the rupee had appreciated against the dollar. If RBI had intervened in that mood so heavily as it did today, it would have possibly changed market sentiment and brought some supply into the market,” he said.
Tracking the weakness in the rupee, the yield on government bonds rose sharply, for a fourth straight day. The yield on the 10-year benchmark government bond 7.16 per cent 2023, after breaching nine per cent during intra-day trade, ended at 8.96 per cent, compared with 8.79 per cent the previous day.
One-month implied volatility in the rupee — a measure of expected moves in the exchange rate that is used to price options — jumped 153 basis points to 18.86 per cent. Three-month onshore rupee forwards fell four per cent to 70.24 a dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts dropped 4.1 per cent to 70.79. The growing likelihood of a Western military action on Syria also pummelled Asian stock markets. While the benchmark stock indices in the Philippines shed 4.6 per cent, Japan’s Nikkei 225 sank 1.5 per cent. On Tuesday, the US stocks had been hit by a broad sell-off.
Rupee has taken more knocks than the Sensex
Currencies and stock markets are falling across emerging markets. However, the impact of the blow varies from country to country. In China, for instance, the currency is up marginally but its benchmark stock index is down. (Emerging-market scorecard)
In India, on the other hand, the currency has taken a much severe beating than the Sensex, suggesting portfolio rebalancing among foreign investors. In Mexico, the stock market has taken a much bigger beating than its currency.
