Currency and sentiment crash, loans to be dearer

Aug 20 2013, 20:41 IST
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The rupee on Monday plunged 2.3 per cent, or 148 paise, to end at 63.13, its biggest single-day fall since September 22, 2011. (IE Photo) The rupee on Monday plunged 2.3 per cent, or 148 paise, to end at 63.13, its biggest single-day fall since September 22, 2011. (IE Photo)
SummaryWith the rupee down, the price of govenment of India benchmark bonds has gone haywire.

The rupee on Monday plunged 2.3 per cent, or 148 paise, to end at 63.13, its biggest single-day fall since September 22, 2011, but neither the finance ministry nor the Reserve Bank of India made any public moves to arrest the decline.

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But the effect of the sustained fall has begun to impact banks. Major banks including HDFC Bank and Axis Bank have begun to raise lending rates, which means people planning on festival loans will have to do a rethink.

Mondayís hands off approach by the RBI is in sharp contrast to the raft of measures taken by it to shore up the currency, including partial capital controls announced a day before Independence Day. From Fridayís opening of 61.35, the rupee went all the way up to 63.30 on Monday before closing at 63.13 to a dollar.

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Since July 15, the central bank has taken steps almost every week to keep the rupee stable but in this calendar year it has dipped by over 12 per cent against the dollar, making it the worst performing Asian currency.

With the rupee down, the price of govenment of India benchmark bonds has gone haywire. The yield on the bond, which is the reverse of its price, went up to 9.26 per cent on Monday. The high yields will make the cost of government borrowings higher and put pressure on the fiscal deficit.

R Sivakumar, head, Fixed Income at Axis MF, said while the initial fall in the rupee was in line with other Asian and emerging markets, ďit is now falling in response to the monetary and administrative decisions taken in the past month.

Related: Nine steps India can take to prevent rupee slide

We believe the rupee will remain weak as long as growth prospects remain weak. Higher interest rates and tight liquidity conditions imposed by RBI has put growth at risk and there is the possibility of further weakness while these measures are in placeĒ.

The rupee is likely to remain under pressure as US treasury yields are increasing in response to the possiblity that the US Fed will withdraw from its easy money approach in September.

The falling rupee has begun to raise the cost of lending by banks. On

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