The rupee recovered from a four-month intra-day low of 63.72 against the dollar on Thursday but nevertheless ended weak, reports fe Bureau in Mumbai.
The fall in the currency was partly the result of domestic shares losing lustre in the wake of weak corporate earnings and the government making demands on foreign portfolio investors to pay minimum alternate tax for previous years. Foreign funds sold $500 million worth of stocks, data showed. Bonds too sold off somewhat with the 10-year benchmark government bond yield jumping to a four-month high.
The Indian currency closed Thursday’s session at 63.42 to the dollar on sales of the greenback by public sector banks and exporters. The rupee has lost 0.60% so far in 2015. Data from the exchanges showed foreign portfolio investors (FPIs) pulled out $500 million from the local share market on Thursday; in the last fortnight they have sold $1.8 billion worth of equities. In April so far, FPIs have bought $1.3 billion worth of stocks and $508.95 million of bonds.
The 10-year benchmark bond yield ended at 7.86% on Friday, after rising 10 basis points in just two trading sessions.
Currency experts say the rupee has been losing its appeal owing to the growing expectation that the RBI would prefer a weaker currency given its overvaluation in terms of the real effective exchange rate (REER). The REER shows that the rupee was overvalued by as much as 13% in March. The currency has since then weakened by nearly 2% but most bankers expect it to fall further to 64-65 over the next three to four months.
Market participants across geographies interpreted the statement as giving a near certainty to a rate hike by June.
“I don’t think a lot has changed and the possibility of a June hike remains. The sentiment towards rupee assets hasn’t been good of late. We still predict the rupee could weaken to 64.50 to the dollar by December,” Anindya Dasgupta, managing director and head of trading at Barclays observed.
Vijayan Subramani, MD, treasury and markets for India at DBS Bank, believes foreign investors’ appetite for Indian risk assets might have diminished, causing a sell-off in government bonds.
Bankers said that the Fed’s statement has added another thread of caution among foreign investors and Indian shares and bonds do not look as flattering as they did before when compared to peers. The recent rise in global oil prices and the forecast of weak rainfall have clouded the outlook on India’s inflation and thereby reduced the room for the Reserve Bank of India to cut rates.
Brent crude was trading around $65.92 per barrel on Friday, sharply up from $57.10 per barrel at the beginning of April. A weak monsoon as forecast by the India Meteorological Department could hit already moderating rural consumption and incomes, which in turn could hurt the recovery in economic growth. With corporate results also showing continued stress, foreign investors are choosing other emerging market assets over India.
Further, foreign investors are miffed at the tax department’s move to demand minimum alternate tax payment retrospectively and prompted some to exit.
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