Mumbai: The rupee ended lower on Monday despite a series of measures announced by the Reserve Bank of India (RBI) last week to quell speculation and encourage more foreign currency inflows even as foreign investors continued to sell shares, adding to the pressure on the local currency.
India’s bellwether equity index, the Sensex, plunged to a 28-month low as weakening macroeconomic indicators and the lack of an effective policy response spooked investors. The 30-share index fell 0.72% to 15,379.34 points after Hong-Kong based Chris Wood, equity strategist at CLSA Asia-Pacific Markets, slashed India’s weightage in its Asian portfolio by 4 percentage points to 6% and said the Sensex could fall to 11,000-12,000 levels, citing lower growth expectations, rupee depreciation and the growing risk of bad loans in the banking sector.
The rupee closed the day at 52.87 to the dollar, lower than Friday’s closing level of 52.71, after crossing the 53 level in intraday trade. What is more significant is that in the non- deliverable forward or offshore market, the one-year forward rupee slipped to 53.35 from 53.04 on Friday.
“Looks like RBI’s bet is going to turn horribly wrong,” said a currency dealer in the market, who did not want to be named.
RBI last week banned Indian companies as well as foreign investors from rebooking forward contracts after cancellations. It also curtailed banks’ ability to trade in the market, said lenders could undertake business on behalf of clients only for genuine hedging, and sharply pared the extent to which banks can keep dollar holdings overnight in their books. Such limits were being decided by the boards of banks before this.
The moves were aimed at curbing speculation but they have led to liquidity drying up in the foreign exchange market and corporations are finding it difficult to get a quote for sums as low as $50 million.
The currency could have fallen more but for the fact that exporters, fearing more such interventions from the central bank, sold the dollar, cushioning the rupee’s fall. RBI has been intervening in the currency market since September and has sold at least $8 billion, according to dealers.
J. Moses Harding, head of economic and market research at private sector IndusInd Bank Ltd, expects more measures from the central bank if the rupee starts sliding again. It hit an all-time low of 54.30 to the dollar last week before RBI stepped in with its measures to stem speculation.
“The measures have definitely prevented the worst. The rupee would have traded at 56-58 a dollar level by now without the measures,” said Harding. He sees it trading at the 51-54 level, which, according to him, is “good for all stakeholders”.
Speculators seem to be staying away from the currency exchanges too. The combined volume in the three currency exchanges fell to Rs 30,999 crore on Monday, from Rs 48,614 crore on Friday and Rs 50,995 crore on Thursday.
Call money at 3-year high
The liquidity crunch was equally severe in the money market with banks borrowing Rs 1.66 trillion from RBI at 8.5% through its repo window. As a result of this, the overnight call money rate, which is expected to be between the reverse repo and repo rate—7.5% and 8.5%, respectively—rose to 9.5%, the highest since November 2008, according to Bloomberg data. RBI infuses liquidity into the system at 8.5% and sucks out liquidity at 7.5%.
CLSA’s Wood warned of a “potential for a reflexive vicious cycle in Indian assets, be it currency, bonds and equities, where negative news builds on itself.”
“The key risk here is the currency given the central bank’s failure to defend the exchange rate more proactively, given the current global context of acute risk aversion and given the existing large dollar borrowing by Indian corporates and related promoters,” Wood added.
Declining growth expectations, the lack of policy reforms and a currency that has been weakening despite stringent measures by RBI have weakened the outlook for Indian equities, analysts said.
Foreign institutional investors (FIIs) sold shares worth Rs 450.37 crore, net of buying, on Monday, according to provisional National Stock Exchange data.
After pumping in a record $29 billion in 2010, FIIs have pulled out roughly $300 million so far this year.
The Indian economy is most vulnerable to global funding risks in the region, said an 11 December report by Chetan Ahya, economist at Morgan Stanley Asia.
“India is the only country in Asia (excluding Japan) with a current account deficit and deeper inflation problem,” wrote Ahya. “India has been dependent on less stable non-FDI capital inflows to fund its current account deficit. A slowdown in these non-FDI inflows is resulting in foreign outflows and currency depreciation pressures.”
Persistently high inflation, rising interest rates, growing fiscal deficit, falling corporate profitability, a weak rupee, slowing investments and gross domestic product growth have already taken the sheen off Indian equities this year.
According to Vikas Khemani, head of institutional equities at Edelweiss Capital, the markets are unlikely to recover until there is policy action by the government.
The Sensex has fallen 36.5% in dollar terms so far this year, making India the worst-performing market in Asia.
“The current level of market panic has, clearly, not been enough with too many government spokesmen continuing to blame ‘Europe’ for India’s problems this year when, in truth, most of the problems are self-inflicted,” Wood said.