The rupee continued to slide for the eighth consecutive session on Thursday and fell to yet another record low of 72.11 against the dollar in intra-day trade before ending the session at a fresh closing low of 71.9875. There were indications of some intervention by the Reserve Bank of India (RBI), dealers said, though the quantum of dollar selling was not known. The rupee has given up nearly 3% in the past eight sessions.
With the dollar index having remained stable on Thursday, other emerging market (EM) currencies too were relatively steady. The rupee, however, slipped to record lows owing mainly to dollar demands in the market. Experts believe that the rupee over-valuation is more or less done with, and said if the bank for international settlements-real effective exchange rate (BIS-REER) is considered, the rupee has achieved its long-term average.
Ananth Narayan, professor of finance at SPJIMR, opines that in the short run, the RBI has ample currency reserves to manage volatility. “The central bank having held the 69 level against the greenback earlier, following other EM currencies, has allowed a move up to 72 now. In my view, it should now use its reserves and hold current levels, rather than risk more panic. However, RBI intervention can only buy us time, within which we have to address issues around our core financial stability,” Narayan explained.
“Our external balance is unhealthy, and we are borrowing expensive money to fund our oil needs, smartphones and gold imports. The core issues around our exports and manufacturing have to be addressed, alongside correction of rupee overvaluation,” Narayan concluded.
A State Bank of India (SBI) report analysed that the movement of rupee against dollar was always followed by appreciation of currency. Once the currency settled at a lower level, appreciation of currency picked up dramatic pace. Economists at SBI added that this time will be no different as currency will start appreciating once the dust settles for the currency to stabilise at a lower level. “In the offshore non-deliverable forwards (NDF) markets the rupee is trading at `75 per dollar levels. During this financial year the rupee has depreciated sharply; with NDF implied yield on rupee hardening sharply from 6.5% to 7.7% in September. The last 364 day treasury bill (T-bill) cut-off was 7.32%. Thus, rupee will continue to face pressure in foreseeable future,” economists at SBI added.
Yield closes nearly flat at 8.056%
Meanwhile, the yield on the benchmark bond went up to levels of 8.088% in intra-day trades. However, they retreated somewhat in sync with the recovery in the rupee to close at 8.056%, almost flat in comparison to Wednesday’s close of 8.050%. Although the bond yields are wary of the inflation rates and a depreciation in the rupee, they are more sensitive to the fiscal deficit presently, and the expectations of rate hikes have to be realigned, dealers said. On the possibility of an open market operation (OMO), experts believe that it would only freeze the bond yields and not reduce it, at least not in the short term.
R Sivakumar, head of fixed income at Axis Mutual Fund, believes that the market should be prepared for at least two more rate hikes, the timing of the hikes, will however be difficult to determine.
“There have been two hikes even before the currency started to depreciate, the recent market behaviour just adds to the possibility of future rate hikes. There is going to be a pressure on the long end of the G-sec curve. We expect some amount of upscale in the yields here on, both from a rate hike cycle perspective and because of a reduction in the demand of G-secs primarily because of reduced OMOs,” Sivakumar said.
In this kind of a scenario, it is very difficult for any market participant to take comfort that the market is fully pricing in the rate hikes and, hence, bond yields have fully reacted.
B Prasanna, head of markets and group executive at ICICI Bank, in an interview to a television channel, said when the rate hike cycle started it looked like a 25 bps hike and done. “It went further and then it looked like 50 bps and done. Then it looked like there might be a long pause, after which, the central bank will end hike. But now, it looks like there might be an imminent third hike, if not in October, at least by December. And then, a fourth hike by February or April,” Prasanna said.
The yield has now hardened by 13 bps in the past seven trading sessions as the markets are convinced the central bank will raise the key repo rate. 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
The rupee has now lost nearly 11.5% since the beginning of 2018.
Crude oil prices have fallen to $77.6 per barrel, down from $78.17 levels two sessions ago. India imports approximately three-fourths of its requirements of crude oil.