The rupee rebounded and stocks bounced back on Tuesday but the currency remained below the 66 mark to the dollar with the Reserve Bank of India (RBI) reportedly absent from the market. Equities recovered in line with the improved sentiment in most Asian markets but foreign institutions remained sellers offloading $314 million worth of equities on the back of sales of $773 million on Monday.
In the last five sessions foreign funds have sold $1.63 billion. Significantly, the yield on the US treasury yield was back above 2%, indicating investors were willing to take on riskier assets.
“(Reserve Bank of India governor Raghuram) Rajan’s commitment to use forex reserves to curb volatility had only a temporary soothing effect this morning. We continue to expect the RBI to eventually defend 65 per dollar by selling up to $20 billion,” Indranil Sengupta, India economist at Bank of America, wrote on Tuesday.
Brijen Puri, head (trading) at JPMorgan, believes the RBI may not defend the currency at a specific level as it would not want to create an imbalance amid a secular fall in most emerging currencies. Puri added the RBI would continue to curb volatility in the market.
The Indian currency outshone most of its Asian peers on Tuesday, staging the biggest single-day recovery since March 2014 to end at 66.10 after having dropped close to 67 levels. Dealers said the view in the market was that Monday’s 1.3% depreciation was overdone.
Mixo Das, Asia ex-Japan Equity Strategist, Nomura wrote Asia was not entering a new financial crisis but the current downside risks may nevertheless persist for some time.
“The pace of decline over the past few days, though, has also brought all of the indices to ‘oversold’ levels on RSI, implying we could see some technical rebound,” Das observed.
He added that broader concerns behind the emerging market outflows — weak EM growth, commodity price downside and looming rate hikes by the US Federal Reserve — were “likely to remain in play until either China data decisively strengthens or Fed hikes are pushed off the horizon”.
While Chinese stock indices closed 7% down, equities from South Korea to Europe recovered and the Dow opened in the green. Indian share indices recouped some losses from the near 6% fall on Monday to end Tuesday’s session 1.0% up. Market watchers said there was a fair amount of short covering and it was too early to tell whether the markets had priced in the uncertainty in China. Domestic mutual funds and insurers had made purchases to the tune of Rs 1,963 crore.
RBI deputy governor SS Mundra echoed Rajan’s statement that the Indian economy was better placed to withstand the impact from the Chinese market meltdown. “”From the viewpoint of where we were two years ago and where we are today, whether it is the level of our foreign exchange reserves or the current account deficit position, and going forward how commodities pricing situation is looking at, I would believe that in medium to long term, we are on the right path,” Mundra told reporters on the sidelines of an event.
On Monday, Rajan had said that the central bank would not hesitate to use its reserves to curb the rupee’s volatility. Currency market experts believe that the rupee’s relative over-valuation that has been hurting Indian exports could deter the RBI from protecting a level for the currency. According to a basket of currencies of 36 competing countries tracked by the RBI, the rupee was overvalued by 12% in July (when the spot dollar/rupee was hovering around 64/$). This could have reduced to an over-valuation of around 8% at current spot dollar/rupee rate.
“If the CNY depreciation is high and sustained, about 40% of India’s REER could turn adverse going forward. There could be a favourable impact on CPI and fiscal account, as long as decline in commodity prices is more than INR depreciation,” said Shubhada Rao, chief economist at YES Bank.
China has been a primary competitor in the global market for exports and Chinese finished goods have also found way into Indian markets in a big way. Indian exports have been shrinking for eight straight months now amid an over-valuation of the rupee. The yuan is down to a four-year low and amid fears that the devaluation will trigger a currency war in Asia, most currencies have hit multi-year lows as well. Given its relatively large over-valuation, the rupee’s fall has been higher than Asian peers ever since the yuan was devalued.