The Indian rupee closed Wednesday at 67.10 against the dollar, 0.06% down from the previous close as investors anticipating a set of hawkish comments from Janet Yellen, who is slated to speak later this week at the Economic Policy Symposium in Jackson Hole, led to a strengthening of the greenback. At 6.30 pm, the dollar index was trading at 94.74, up 0.22% from the previous close.
Market participants said that they expected US Fed chair Yellen to hike rates at the next FOMC meet since US labour data, jobless claims data and retail spending data have all indicated an uptick in the US economy.
Moreover, a few dealers pointed out that the recent rise in crude price has also weighed on most emerging market currencies, including the rupee. The price of Brent crude has increased by $7.35 per barrel since August 1 and is currently trading at $49.40 per barrel.
The weakness in the rupee was mirrored by all emerging market currencies, with most of them falling in the range of 0.15-0.85% on Wednesday from their previous close. Dealers see the rupee remaining range-bound between 66.70-67.40 in the near term.
Rating agency India Ratings expressed a similar view in a report, in which it said that the market’s perception of Urjit Patel as an “inflation hawk” would keep the near-term movement in the rupee anchored. It added that the two major downside risks for the rupee in the immediate term would be weak foreign portfolio flows and a potential resurgence of risk-off sentiment.
Incidentally, FPIs have net sold Indian debt securities worth $1.18 billion since the beginning of 2016, while they bought equities worth $5.83 billion. The 10-year benchmark bond yield closed Wednesday’s session at 7.13%, marginally down from the previous close of 7.16%. This marginal recovery in bond prices comes after a massive sell-off of debt securities on Monday, which was the first active trading session after Patel being announced as the Reserve Bank of India’s new governor.
The sell-off was primarily a reaction to Urjit Patel’s appointment as the new governor of the Reserve Bank of India (RBI), which investors perceived as a signal that the central bank would not cut interest rates in the immediate term. Patel is currently the deputy governor of the RBI responsible for monetary policy and, by extension, for pushing through RBI’s inflation-targeting philosophy.
Speaking about its outlook on bond yields, India Ratings said an upward bias in yields is likely to remain, especially in the absence of any more positive developments and also because of the limited scope there is for more open market purchases. “The rally in the bond market since the beginning of July was led by several positives: benign global conditions, low crude oil prices and adequate domestic liquidity. The agency believes that in the absence of meaningful triggers, debt investors are likely to be in a ‘wait and watch’ mode,” the rating agency said.