The rupee on Tuesday crashed to new lows hitting 74.3935 against the dollar in intra-day trade before staging a mild recovery to close at an all-time low of 74.3875. The currency depreciated 32 paise amid deepening concerns over India’s current account deficit (CAD), fund outflows and the continued pressure from RBI’s unexpected decision of keeping the repo rate unchanged.
The currency markets had been hoping that RBI would defend the currency with an interest rate hike in its monetary policy announcement last week. Despite the turmoil in currency, the premium on three-month forward contracts closed at the same rate as on Monday of 4.55%.
Experts believe the markets had factored in a rate hike from the central bank as other emerging markets such as Phillipines and Indonesia are actively pursuing interest rate defense to keep their currency stable. An expert said: “China has made sure there is ample liquidity in the market by cutting RRR by 100 basis points (bps) over the weekend to support uncertain growth amid slowing exports. The domestic market expected an intervention on behalf of currency from the central bank”
Meanwhile, bonds sold off sending the benchmark yield to 8.08%, up eleven basis points from the previous close of 7.97% on Monday.
Indranil Sengupta, economist, Bank of America, estimates that liquidity deficit in the money markets will average Rs 50,000 crore in the December quarter even after Rs 90,000 crore of OMO and Rs 10,000 crore cut in the net borrowings by the government in H2FY19.
Manish Wadhawan, MD and head of fixed income, HSBC India, had earlier told FE that India may need durable long term funds and NRI bonds seem to fit well in this situation. “The possibility of issuance of NRI bonds is not ruled out primarily because our current account deficit (CAD) as we face a mismatch due to the foreign institutional investors (FII) flows,” he said.
With currency weakness likely to persist, foreign funds sold $1.2 billion worth of bonds in September, taking the total sales since April to $7.3billion. A money market expert observed, “Selling in equity markets will continue; where foreign investors would choose to exit and, perhaps, re-enter at a later stage.”