Rupee recovers from record closing low; bond yield rises

By: | Published: August 29, 2018 2:44 AM

The rupee on Tuesday dropped all the way to 70.29 in intra-day trades against the dollar before recovering at the close of the session to 70.09.

India’s current account deficit has soared to a near five-year high of billion, raising concerns on the current account front.

The rupee on Tuesday dropped all the way to 70.29 in intra-day trades against the dollar before recovering at the close of the session to 70.09.
Meanwhile, the yield on benchmark 10 year-bond rose to 7.897, up 0.3 basis points (bps) to hit its highest level in one-and-a-half months.
Currency experts believe the immediate cause for the rupee’s decline is a strong dollar demand from oil companies and other importers for month-end payments. Moreover, the dollex has remained strong.

The dollex on Tuesday was ruling at levels of 94.459 compared with levels of 94. 779 on Monday. Rising interest rates in the US and a strong economy are keeping the dollar strong. On August 16, the domestic currency had tumbled to an intra-day low of 70.40 before closing at a life-time low of 70.15 against the US dollar.

Since January, the rupee has weakened 8.69% against the dollar even as foreign portfolio investors (FPIs) have sold $311.72 million and $7.9 billion in equity and debt markets.

According to experts at Care Ratings, the ongoing trade war between Turkey and the US is also taking a toll on global currencies, “post July 25, when the trade war escalated between the two countries, the euro fell 3.2% as the dollar strengthened in the second period. The lira fell by 25.2% and all the four major Latin American currencies (Argentina peso, Mexican peso, Brazil real and Chile peso) have depreciated at a higher rate than the rupee.

Although, when compared to other major Asian currencies, the rupee has fared unsatisfactorily in this period.” they said.

Notably, India’s current account deficit has soared to a near five-year high of $18 billion, raising concerns on the current account front.

According to analysts at Credit Suisse, “Even if the elevated trade deficits in June/July were temporary, the FY BoP deficit would still be $20 billion. And if the monthly trade deficit sustains at a rate of $17/18 billion, the BoP deficit could be much larger. Of the three options available to close this gap – cutting imports, boosting exports, and attracting more foreign capital – only the first is truly controllable locally, and can potentially work rapidly. With consumption exceeding production, and there being not enough foreign capital to bridge the gap, a demand slowdown is being engineered with a higher USD/INR and rising interest rates.”

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