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The weakness in the equity markets percolated to the currency market as the rupee breached the psychological 64 per dollar mark for the first time since September 2013 on Thursday.
The central bank intervened in the foreign exchange market but that was not enough to curb the fall as the currency ended the day at 64.24 per dollar compared with the previous close of 63.54, a drop of 1.10 per cent or 70 paise.
Thursday’s fall in the rupee — whose performance was the worst among major currencies – was the steepest since January 24, 2014 when it had ended at 62.69 a dollar, recording depreciation of 1.21 per cent or 75 paise. (CURRENIES AGAINST THE US DOLLAR)
Even though the currency has weakened by 2.8 per cent against the dollar since end-March, market participants say more correction is due and the currency could touch the 65 per dollar mark.
“Right now everybody in the world is terrified, due to which they are selling everything, as a result of which the rupee has gone down,” said Jamal Mecklai, CEO, Mecklai Financial Services. "People are going to remain nervous for a while. I think the rupee is going to remain under pressure. But the RBI will try to prevent the rupee from falling too much more. I don't think the rupee will fall beyond 65.50 in the near term.”
Thursday’s fall has led to the rupee being the worst performer against the dollar among major global currencies. According to experts, the rupee is still overvalued by about 10 per cent on a 36-country REER (real effective exchange rate) basis, as a result a correction is due.
The situation has undergone a major change because the REER for six-currency trade-based weights was at an all-time high of 125.22 in March. A high REER indicates the rupee was trading strong against most major currencies of the world.
Bond and equity markets were also under pressure, as the yield on the 10-year benchmark bond moved up 10 bps to close at a five-month high of 7.99 per cent. A 23 per cent rally in Brent crude oil since end-March has sparked concern about inflation and the scope for further interest rate cuts.
“Today, the stock market did not perform well. Crude oil prices have gone up. Even in other emerging markets, the currency has weakened. In India foreign outflows are happening in debt as well as equities. Due to foreign investors selling debt, bond yields have also risen,” said
N S Venkatesh, executive director and head of treasury at IDBI Bank. The equities market continued with its downward trajectory, with the benchmark Sensex ending at a more than six-month low. The fall in the Indian market mirrored weak performance in Asian and European equities as a spike in government bonds spooked investors.
Foreign institutional investors (FIIs) continued with their selling spree as concerns surrounding tax uncertainties prevailed. According to provisional figures, FIIs were sellers to the tune of Rs 1,360 crore on Thursday as well. In the last 10 sessions, FIIs have sold shares worth over Rs 10,000 crore from the cash market.
“Despite the near-term concerns, we continue to maintain our constructive view on the market as we believe that the government is focused on laying foundations of a robust and structural growth environment. After the recent correction, Sensex valuation has now moved lower to 15.6 times one-year forward EPS, which is in line with the past 10-year average,” said Deutsche Bank analysts Abhay Laijawala and Abhishek Saraf in a note.
