The Federal Open Market Committee will probably decide to reduce its $85 billion in monthly bond purchases at its September 17-18 meeting, according to 65% of economists surveyed by Bloomberg News from August 9 to 13.
The rupee has now lost more than 15% since May 22, when the Fed first hinted it might taper bond purchases, with foreign institutional investors (FIIs) pulling out close to $10 billion from the bond markets and $42 billion from the equity markets. While FIIs bought limits to buy $10 billion worth of bonds at an auction on Tuesday, a sinking rupee might keep them from picking up the bonds.
Meanwhile, the Reserve Bank of Indias (RBI) proposed buyback of bonds, announced late on Tuesday, enthused the money markets; bonds rallied with the yield on the benchmark closing a good 50 basis points lower at 8.41% compared with 8.92%. The central bank plans to infuse liquidity through open market operations Rs 8,000 crore this week and has given banks a fair bit of flexibility on their bond portfolios, which will help reduce investment losses cause by rising yields.
While bank stocks bounced back, the sentiment in the equity markets stayed weak; the Sensex fell for the fourth consecutive session, losing 340.13 points to close below 18,000 for the the first time in nearly a year. India remains the worst performer in Asia with the Sensex having shed a whopping 21% in dollar terms since January; Chinas benchmark index Shanghai Composite has given up just 7.03%, while South Koreas Kospi and Indonesias Jakarta Composite are down 11% and 13%, respectively.
More worrying, though, is the continuing weakness in the currency, which will hurt a host of corporates with unhedged foreign exchange exposures as also importers.
The depreciating rupee could prompt FIIs to take more risk off the table as the value of their investments gets eroded. With their ownership of Indian equities at an eight-year high, the market remains vulnerable to a sell-off in the last four sessions, however, they have sold shares worth just $524 million although the outflows since May 22 have crossed $2 billion. It is a very thin and illiquid market in where the demand for dollars largely from FIIs is causing a fall, said Hitendra Dave, head of global markets at HSBC. Dealers pointed out that large dollar purchases, not just by foreign banks but also by public sector banks, had pressured the currency. PSU banks have been buying dollars for oil companies, so its not just FII dollar outflows that is causing the weakness, explained a currency dealer with a foreign bank.