Some of the weakness was attributed to dollar purchases by importers and equity hedgers through state-run banks.
The rupee on Friday continued to slip and nudged a fresh low of 71.001 against the dollar in intra-day trades before staging a slight recovery to end the session at a record closing low of 70.995. Some of the weakness in the currency was attributed to dollar purchases by importers and equity hedgers through state-owned banks.
The dollar index — Dollex — strengthened a tad on Friday and was trading in the region of 94.95 on Friday, up from 94.72 on Thursday. Again, while foreign funds have been selling stocks, at $344 million across four sessions, the amount is not very large. They sold bonds worth $154 million on Thursday. Foreign investors still remained net buyers for about $403 million till August 30.
Experts say that this is the first time that the rupee has depreciated but the market has yielded a positive return, this was primarily because the domestic flows have created a more diversified set of investments and offset the pain arising from foreign portfolio investors (FPI) offloading their holdings.
Meanwhile, the yield on the benchmark bond rose to 7.95%, two basis points (bps) over Thursday’s close of 7.93%. In August alone, the yields have hardened by 25 bps. Lakshmi Iyer, CIO – Debt and head – Products, Kotak AMC noted that market yields have already sold off quite a bit. “The selling comes in line with expectations of good gross domestic product (GDP) at 8.2% for April-June quarter. The fluctuations in the rupee and crude will be the key to future movements of the yields,” Iyer added.
The rupee has lost nearly 10% since January and is the third-worst performing currency in the emerging markets (EM).
PK Gupta, MD, National Banking Group, State Bank of India (SBI) , believes that a little bit depreciation of the rupee should not really affect too much at this stage. “It has to be noted that globally most of the currencies like the Argentian peso and Indonesian rupiah have lost against the dollar, the rupee’s loss against the greenback has been much lesser in comparison to other EM currencies. the rupee value is not so much of a concern at this point in time, rupee in any case has been overvalued,” Gupta added.
With the rupee inching towards the 71 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.
Although economists highlighted that a calibrated depreciation was not too worrying, a weaker rupee, since it would help exporters compete efficiently they concede would make imports costlier and push up inflation. They 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 Wednesday the CAD was expected to be largely financed by FDI flows. In August alone the rupee has yielded a negative return of 3.4%, the highest monthly loss in three years. On a year-to-date basis, the rupee has given up over 10%. In 2018, the rupee has ended in red in all months except in January.
The Brent crude prices have gone up by $5.24 a barrel in August, to $77.63/barrel on Friday.