Tragic Tuesday: Risk aversion to emergency markets hits R, bonds

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Updated: December 17, 2014 3:57:41 AM

The rupee slipped past the psychological 63/$ mark to end at a 13-month low of 63.53/$.

The Indian rupee slipped past the psychological 63/$ mark to end at a 13-month low of 63.53/$ on Tuesday as risk aversion towards emerging markets weighed on sentiment and a 26% increase in the country’s trade deficit in November sparked concerns over balance of payments.

“Primarily, the rupee’s fall has been due to the risk aversion in the global markets. The higher trade deficit has added to the pressure,” said Ashish Parthasarthy, the head of treasury at HDFC Bank. Most emerging market currencies fell against the dollar on Tuesday as worries that a weak growth in China and oil-exporting countries could drag global growth down spurred foreign investors to exit.

A fall in the stocks of the emerging market economies rekindled fears of a contagion. The composite dollar index’s steady rise along with regional concerns bogged down currencies such as Indonesian rupiah, Russian rouble, Turkish Lira and Japanese yen.


The dollar index was trading at 87.94 on Tuesday and has risen 9.77% so far in 2014. “The dollar index, which measures the greenback against a basket of major currencies, is soon likely to touch its previous peak of 92, from current levels of 88,” said YES Bank in a note on currencies.

The rouble hit a fresh all-time low and has lost a massive 50% year-to-date as the largest interest rate increase failed to lift sentiment on the economy. The rupiah continued to stay weak after being hit hard on Monday due to a big selloff in the sovereign bond market.

With foreign investors continuing to buy Indian bonds and shares, the fall of the rupee has been only 2.73% so far in 2014. A large part of this fall has been due to the RBI’s dollar purchases. Data from the RBI show that the central bank bought around $14 billion from the market between July and October. In the spot market, it bought $9.08 billion and in the forwards, the bank purchased $5.10 billion. Incidentally, the rupee’s biggest fall (5.23%) was over the last six months.

RBI, however, was believed to have sold dollars on Tuesday to prevent a sharp depreciation of the currency. “There was some dollar selling around 63.54/$ levels which looked like it was by the RBI,” said a currency dealer at a public sector bank.

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