“Given the current global environment and the RBI move, the probability of a rate hike in October has diminished and we are putting our call on one more rate hike under review,” said a research note from US investment bank Goldman Sachs Group Inc. on Wednesday.
Currency dealers said RBI might stay away from the market at the current rupee level and will not sell the greenback, as the regulator’s dollar sales suck out rupee liquidity from the financial system.
On Wednesday, RBI injected Rs59,480 crore into the system in two phases to fund-starved banks.
Since the beginning of the week, on an average, the central bank has been infusing more than Rs55,000 crore into the banking system every day.
The rupee has been declining for the past month because of the dollar’s rally and an acute dollar shortage in the local market caused by capital outflows from slumping equities, offshore demand for rupee forward contracts and demand from oil companies.
Sell-off ‘overdone’
The rupee sell-off is “overdone”, said the Goldman Sachs report. Concerns about the vulnerability of India’s balance of payments may be excessive, it said.
“While outflows of FII (foreign institutional investor) investments in the equity and real estate market is a key risk, domestic residents have little appetite for foreign assets and the government has very little foreign currency-denominated debt,” the Goldman Sachs report said.
With the price of global crude oil dropping to around $90 (Rs4,167 today) per barrel, the estimated full-year current account deficit will fall from $50 billion to $35 billion, said Citigroup’s Malkani.
Explaining factors that could work in favour of the rupee, she said that “although portfolio funds will likely remain negative, foreign direct investment (FDI) remains buoyant”. Gross FDI during the fiscal first quarter doubled to $10 billion, from $5 billion a year earlier.
The rupee rally did not spill over to the bond market as traders locked in profits. The yield on the benchmark 10-year paper rose from 8.09% to 8.19% as bond prices fell. Bond prices and yield move in opposite directions. The 10-year bond yield was 9.47% in June.
Sensex declines
On BSE, the Sensex swung about 500 points between its day’s high and low. On the National Stock Exchange, the broad-based 50-stock Nifty lost 1.6%, but managed to stay just above the psychological 4,000 level.
“There is reasonable basis to believe that the market might be over-reacting,” said Dhananjay Sinha, strategist and economist at local securities house Centrum Broking Pvt. Ltd, in a note to clients on Wednesday.
The rally in Asian markets was trimmed by continuing worries about more likely financial failures in the US, disappointment over the US Federal Reserve leaving interest rates unchanged and a real estate slowdown in China.
The Chinese benchmark index dropped some 3% on Wednesday while Hong Kong’s Hang Seng slumped more than 3.6%.
The US market had risen on Tuesday after the Fed announced a $85 billion rescue plan for the distressed American International Group Inc. (AIG), the largest insurance firm in the US.