Apprehensive that the rupee could weaken further as crude oil prices soar, foreign portfolio investors (FPIs) have dumped Indian bonds worth more than $4.5 billion over the past month or so. The sales in the equity market, at close to $1.63 billion over the same time, have been far smaller. However, the foreign exchange outflows have, in turn, aggravated the pressure on the rupee.
The rupee lost 38 paise on Wednesday to drop to 68.426 against the dollar, the lowest level in nearly 18 months. Another 40 paise loss would take the currency to the all-time closing low of 68.825 seen on August 28, 2013.
The weakness in the Indian currency was in sync with the fall in a host of other emerging market currencies during the day. Many of them recovered but the Turkish lira lost 3.5%.
Since January, the rupee has lost 6.7%. Over the past month, the US dollar Index — Dollex — has gained 3.5%. Treasury yields in the US have been rising over the past couple of months and hit 3.11% on May 17. The price of Brent oil was ruling at around $79 per barrel.
The weakening rupee could prompt foreign investors to offload more bonds market observers said, since otherwise their portfolios would continue to lose value. To be sure, other emerging markets which are vulnerable to rising crude oil prices have also seen sell-offs in their bond markets. Manish Wadhawan, MD and head of fixed income, global markets at HSBC India, points out there is some general aversion to emerging market bonds at the moment with a sell-off taking place across Latin America as well as Asian countries like Malaysia and Indonesia. The value of bonds outstanding in the FPI portfolio is close to $63 billion of which $33 billion is invested in gilts and $30 billion in corporate bonds.
Ananth Narayan, professor, finance, at SPJIMR, said that FPIs will likely continue to be nervous with the move up in oil prices, fears around fiscal slippage, the worsening external sector, politics and global geopolitics.
“Higher global oil prices impact us more than most other countries, given our significant oil import bill. The fear amongst carry traders, including some FPI in debt, is that if crude oil was to move up to and sustain at $100 a barrel or more, India could be counted amongst the fragile economies of the world all over again,” he said.
“In addition, Indian bonds are not part of global bond indices — off-benchmark holdings are vulnerable during risk-off periods,” Narayan said.
The Reserve Bank of India (RBI) recently revised the rules for investments by FPIs in Indian bonds, allowing a lower residual maturity for some categories of bonds.
The auction mechanism was withdrawn and, moreover, the caps on aggregate FPI investments in a single security were revised. The central bank revised the cap on aggregate FPI investments in any central government security to 30% of the outstanding stock of that security from 20%.
The new measures were aimed at boosting foreign fund inflows cooling borrowing costs at a time when yields are on an upward trajectory.
(Bhavik Nair and Tushar Goenka)