Mumbai:Nervous global investors pulled funds out of India on Wednesday, sending the rupee tumbling to a record low, while equity prices dropped to their lowest level since 9 January.
The Indian currency closed at an all-time low of 54.495 to a dollar, down 1.3%, after touching 54.5225 earlier in the day, while the 30-share BSE benchmark Sensex index ended 1.83% lower at 16,030.09 points. Both tracked broadly similar declines in other emerging markets.
“It is difficult to predict a bottom as several issues are affecting the market. Domestically, we have growth worries and a weakening currency, while the euro zone issue continues to be a hanging sword. Personally, I feel we will not fall much from current levels and investors can slowly start accumulating fundamentally good stocks,” said Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd.
Both the Sensex and the Nifty are trading below their 200-day moving averages, a key technical level watched by traders.
With the rupee falling to a new low, Mint’s Joel Rebello looks at the options for the Reserve Bank and the government
The worsening crisis in Europe led investors to pull money back into relatively safe havens such as the US and Germany, where yields on government bonds dropped, a sign of risk aversion. The dollar continued to strengthen.
Foreign investors have sold a net $298.42 million (around Rs 1,620 crore today) of Indian equities so far this fiscal. On Wednesday, their net sales were $100 million, according to provisional data available on the BSE website.
Indian authorities quickly tried to assuage fears about the growing risks to the domestic economy.
In Parliament, finance minister Pranab Mukherjee said that the fall in the domestic markets was because of the crisis in Greece, while the Indian growth story was intact.
Ahmed Raza Khan/Mint
“I don’t want to press the panic button, but austerity is needed,” he added, “to convey the signal that we are responding to the situation”. He was speaking during a debate when senior Bharatiya Janata Party member Murli Manohar Joshi asked whether India was heading towards a 1991-style crisis.
In Mumbai, Reserve Bank of India (RBI) deputy governor K.C. Chakrabarty reiterated that the central bank would intervene only to curb excess volatility in the rupee, rather than target a particular rate.
“The value of the rupee is market-determined. RBI intervenes only to check volatility in the foreign exchange market,” he said.
The rupee got a breather last week after the Indian central bank ordered exporters to convert half their dollar holdings into rupees. RBI also sold dollars earlier this week, traders said.
Prashant Jain, chief investment officer of HDFC Asset Management Co. Ltd, questioned the theory that the fall in the Indian markets is merely a reaction to the problems in Greece. “There are two problems with our country these days: fiscal deficit and current account deficit. I don’t agree with this popular theory that Greece is the reason why our markets are falling. Greece could be the reason for one day, but it cannot be the reason why our markets fall for, like, three months.”
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India could be more susceptible to another global shock, since its fundamentals have deteriorated since 2008, with higher fiscal and current account deficits that provide policymakers with fewer options to build a firewall in case of a new global crisis.
Investors have also been spooked by recent tax policies.
“Market participants expect foreign institutional investors (FIIs) to commence selling, given the increasing uncertainties in Europe and their nebulous tax status in India. The foreign exchange market appears to be nervous about these potential outflows,” said U.R. Bhat, managing director of Dalton Capital Advisors (India) Pvt. Ltd.
“In fact, there is a good case to attract FIIs to establish offices in India with a low level of taxation instead of asking them to create commercial substance elsewhere, thus diverting employment opportunities and direct and indirect economic benefits,” he added, referring to the general anti-avoidance rules to curb tax evasion that were proposed by the government in the Union budget, but have since been postponed by a year to calm the markets.
Others also made a case for policymakers to strengthen dollar inflows into the economy.
“INR (Indian rupee) continues to remain extremely vulnerable to both global and domestic headwinds. Though measures such as dollar bonds, creating a special window for the oil companies and enhancing the FII debt limit, apart from physical intervention, may be able to curb the losses in the short term, structural reforms and greater commitment by the government towards fiscal discipline are key for ensuring sustained gains in the rupee,” said Upasna Bhardwaj, economist at ING Vysya Bank Ltd, in an emailed statement.
The weakening rupee could also put pressure on the financials of firms that have large dollar loans on their books, said corporate finance experts.
“The situation is very grim and it is unlikely that the rupee will find any support soon. Essar (Group) is naturally insulated against the adverse rupee-dollar movement since most of our receivables and expenses are in dollars. For companies whose balance sheets are largely dollar-denominated, the differential between rupee and dollar loans is still attractive as long as you don’t have to pay a premium for forward hedge,” said V. Ashok, group chief financial officer (CFO) of Essar Group.
Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities Pvt. Ltd and former head of treasury at ITC Ltd, said that given the adverse movement of the dollar against the rupee, many Indian firms and banks were looking to raise debt in other currencies such as the Swiss franc, which has showed more stability.
Koushik Chatterjee, group CFO of Tata Steel Ltd, added: “Companies will stop looking at raising foreign exchange loans. With the cost of raising the loan and swapping it into rupees, the net impact is the same as raising a rupee loan. We (Tata Steel) have hedged our exposure long back, but somebody getting into the market now to hedge foreign currency exposure on account of existing loans will find it significantly expensive.”
Anirudh Laskar, Kayezad E. Adajania and Anup Roy in Mumbai, and Asit Ranjan Mishra in New Delhi contributed to this story.