Indian currency second-worst performer in Asia.
The Indian currency on Tuesday fell to its lowest level in almost eight months as a slump in equities spurred concern that investors are pulling money out of emerging markets in favour of safer assets as Europe’s debt crisis threatens to undermine global economic growth.
Traders said the euro’s drop to a near four-year low versus the US dollar also hurt the rupee. The index of the dollar against six major currencies was up 1.2 per cent.
The rupee fell 1.5 per cent to close at 47.705 per dollar. It fell earlier to 47.745, the lowest level since October 5. The rupee has lost 7 per cent this month, the second-worst performance among Asian currencies after South Korea’s won.
Last week, the rupee had fallen 3.8 per cent, its biggest weekly drop since an 11.7 per cent dive in mid-July 1996. So far this week, the rupee is down 1.6 per cent.
“The fall in equities was too big for small inflows to make a difference on Tuesday. 48.30 looks like the next target for the rupee and could be tested in the next 10 days or so,” said Nitesh Kumar, an interbank dealer with Development Credit Bank.
The BSE Sensex skidded 2.7 per cent to its lowest close in three-and-a-half months as Europe’s sovereign debt woes sparked heightened fears of large foreign fund outflows.
Foreign institutional investors (FIIs) have withdrawn nearly $2 billion from Indian stocks so far in May, reducing net inflows in 2010 to $4.6 billion. The withdrawals were a key reason for the rupee’s fall this month.
The rupee’s one-month implied volatility, a measure of expectations of swings in exchange rates, climbed to 18 per cent on Tuesday, the highest since February 2009, Bloomberg data showed. The gauge of expected currency swings is quoted by traders as part of option prices.
“Things are looking very dicey at the moment, so people are selling risk. It’s not very clear where the rupee is heading, but it is unlikely to strengthen in a hurry,” said Kumar.
Dealers said there was good demand from importers looking to meet month-end demands, which also weighed on the rupee. The demand for dollars tends to peak towards the end of each month, when importers are required to make payments.
Bond yields hold near six-month low
India’s 10-year bond yields held near their lowest levels in almost six months on speculation cash at banks may be adequate for telephone companies to pay for 3G license fees.
Benchmark notes headed for their best monthly performance since April 2009 on optimism the Reserve Bank of India won’t increase interest rates before the next policy review on July 27, as Europe’s debt crisis clouds the outlook for economic growth. The government didn’t expect a liquidity crunch due to 3G payments, Finance Secretary Ashok Chawla said yesterday.
“The market is encouraged by comments from policymakers that cash conditions will be managed comfortably ahead of the 3G outflow,” said Srinivasa Raghavan, head of fixed-income trading at IDBI Gilts in Mumbai. “Investors are also flocking to safety due to the volatility of equity markets.”
The yield on the 7.80 per cent bond due May 2020 was little changed at 7.40 per cent as of the 5.30 pm close in Mumbai, according to the central bank’s trading system. The price was at Rs 102.76 per Rs 100 face amount.
“The central bank has always assured adequate liquidity in the system,” Deputy Governor Shyamala Gopinath said on May 20.
Vodafone Group Plc and Bharti Airtel were among nine carriers that bought 3G wireless permits in an auction, raising Rs 67,720 crore ($14.6 billion) for the government. The budget target was Rs 35,000 crore.
Monitoring liquidity
Surplus cash in the banking system, as reflected by the central bank’s daily reverse-repurchase auctions, dwindled to Rs 6,720 crore from Rs 35,760 crore in the past two weeks.
The Reserve Bank of India was monitoring liquidity in the nation’s banking system after the sale of high-speed phone services, Governor Duvvuri Subbarao said on May 20.
The central bank last increased all the three policy rates by 25 basis points each on April 20 to damp inflation. The repo rate, or the rate at which the central bank lends, is now at 5.25 per cent, while the reverse repurchase rate is 3.75 per cent. The cash reserve ratio, the proportion of cash lenders have to keep with the central bank, is at 6 per cent.
Global economic conditions have changed in the past six weeks and a “cautious pace is the best way to go and that is the stance,” Subir Gokarn, the deputy governor in charge of monetary policy at the Reserve Bank of India, said on May 19.
Call: Ends steady at 4%
The call rate ended steady at 4 per cent as banks’ demand for funds persisted to meet reserve needs in the first week of the reporting fortnight on the view liquidity may tighten next week.
The one-day call rate ended at 3.85-4 per cent as against 3.95-4 per cent on Monday.
“Liquidity may tighten next week as excess cash in the system is around Rs 10,000 crore and payment towards auction of 3G spectrum is around Rs 67,700 crore,” said a dealer with a private bank.
