Currency woes: Rupee at new low, yields trend higher

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Mumbai | Published: September 6, 2018 5:59:37 AM

Rupee edges closer to the 72 mark vs the dollar, ends session at fresh closing low of 71.75.

rupee, currency, economy, dollarWith the rupee inching toward the 72 mark currency experts said companies had started hedging any residual unhedged forex exposures.

The rupee on Wednesday slipped to yet another record low of 71.97 against the dollar in intra-day trades before ending the session at a fresh closing low of 71.7562. Dealers said the Reserve Bank of India (RBI) had stepped in to intervene though the quantum of dollar selling was not known. The rupee has given up 2.3% in the past six sessions alone.

Meanwhile, the yield on the benchmark bond rose to a near four-year high of 8.111%, in intra-day trades. However, they retreated somewhat in sync with the recovery in the rupee to close at 8.049, two basis points (bps) lower than Tuesday’s close of 8.063%.

The yield has now hardened by 15 bps in the past seven trading sessions as the markets are convinced the central bank will raise the key repo rate by at least 25 basis points if not 50 bps between now and March 2019. Fears of the rate hike have led to a sharp fall in banks’ stocks in the past couple of sessions as investors apprehend losses on lenders’ bond portfolios.

The sharp decline in the rupee even without any strengthening of the dollar has left the currency markets jittery.

Soumya Kanti Ghosh, group chief economic advisor, State Bank of India (SBI), believes much of the correction is now done and any sharp depreciation from here on might result in costs outweighing benefits. “The fall may have been initially triggered by global headwinds but the pace of depreciation in the last couple of days has rattled the markets,” Ghosh said.

Ashutosh Khajuria, ED and CFO, Federal Bank, observed the depreciation would have been welcome had it come over a period of five to six months rather in just about a month. “This has cause pain to the real economy,” Khajuria said.

The rupee has now lost 11% since the beginning of 2018. It continues to be Asia’s worst performing currency and the has yielded the third worst returns amongst the emerging market (EM) currencies. The currency markets remain anxious because crude oil prices have shot up sharply over the last two weeks and India imports approximately three-fourths of its requirements of crude oil.

With the rupee inching toward the 72 mark currency experts said companies had started hedging any residual unhedged forex exposures. Analysts estimate that more than 50% of the foreign exchange liabilities of the companies in the BSE 500 universe have a natural hedge in the form of forex revenues.

With oil prices remaining elevated, economists now expect the CAD (current account deficit) to widen to around 2.7-2.8% of the GDP in 2018-19 from 1.9% in 2017-18. The RBI said in its annual report on pointed out that the CAD was expected to be largely financed by FDI (foreign direct investment) flows.

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