Rupee breached the key 64/$ mark on Monday as an uncertain monsoon reduced the appeal of Indian assets further amid the looming rate hike by the US Federal Reserve, making foreign investors dump equities and bonds.
The currency ended at 64.08/$ on Monday, down 0.51% against Friday closing number. Data from depositories showed that foreign investors have pulled out $245 million from domestic equities and $1.6 billion from the bond market since May.
“Globally, fixed income market has moved sharply. Yields on treasuries and German bunds have all moved up sharply which affects the currency market as well. Inflows into domestic bonds have slowed. Outlook on monsoon is weak,” said Ananth Narayan G, regional head of financial markets for South Asia at Standard Chartered Bank.
Fresh data from the US indicated the Fed would likely hike interest rates in the second half of 2015. Given that the US interest rates are set to rise, foreign investors have began exiting emerging market assets, including India. Bond yields across markets have gone up and yields on domestic bonds too have increased.
The yield on the benchmark 10-year 7.72%, 2015 bond has risen 10 bps since last week. Dealers said that amid such global negative sentiment, the Reserve Bank of India’s indication that it may not cut rates further has dampened mood here. The central bank slashed its repo rate by 25 basis points at its bi-monthly policy review on June 2 but hiked its forecast of retail inflation to 6% by January 2016 from the previous 5.8%.
Although the rupee has weakened 1.63% so far in 2015, it remains one of the better-performing currencies among the emerging markets. Most other currencies notably Brazilian real, South African Rand, Indonesian rupiah and Malaysian ringitt have all weakened more than 8% so far in 2015.