BackRupee closes at 11-month low of 62.95 per dollar
The rupee's intra-day fall of 1.03% was sharpest since 6 August
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Mumbai:
The Indian rupee on Monday closed at an 11-month low as foreign investors started liquidating their emerging markets portfolio at the end of the calendar year, putting pressure on emerging markets currencies. Weak domestic industrial output data, as well as a relatively thin trading volume, added volatility in the currency, triggering stop losses at 62.50 a dollar level.
Foreign institutional investors (FIIs) traditionally book profits in their investments globally as they close their accounting books at the year-end.
The rupee on Monday closed at 62.95 a dollar, the lowest since 27 January. The rupee’s intra-day fall of 1.03% was sharpest since 6 August.
The local currency had opened at 62.51 a dollar and fell to 62.96 during the day. Currency dealers say the Reserve Bank of India (RBI) stayed out of the market and did not sell dollars to check the rupee’s fall.
Currencies across the region showed mixed trends. The Indonesian rupiah was down 1.92%, the Thai baht fell 0.55%, the Philippines peso slipped 0.24% and China’s renminbi shed 0.1%. However, South Korean won was up 0.36%, the Japanese yen gained 0.11% and Singapore’s dollar added 0.1%.
Since the beginning of this year, the rupee has weakened 1.82% against the dollar, while FIIs have bought $17.22 billion from local equity markets and $26.21 billion from the debt market.
At the time that the Indian currency markets closed, the dollar index was trading at 88.497, up 0.15% from its previous close of 88.363. The index measures the greenback’s strength against major global currencies.
“Rupee is down because of global risk aversion," said Satyajit Kanjilal, managing director at Forexserve, a currency consultant. India’s weak industrial output data also worked against the sentiment, he said.
Data released after market hours on Friday showed that the Index of Industrial Production (IIP) shrank 4.2% in October, dragged down by manufacturing, which contracted 7.6%. The mining and electricity sectors grew 5.2% and 13.3%, respectively, during the month.
“India’s weak industrial production print on Friday serves as a reminder that growth in many EM (emerging markets) countries is still below potential, despite reform optimism," HSBC Global Research wrote in a report on Monday.
According to the report, much of the currency bullishness in the region, particularly in the Indian rupee and Indonesia’s rupiah, came from carry trade, which is borrowing cheap from a low-interest-rate developed economy and investing in high-yielding emerging markets.
One possible reason for the sudden weakness could be “a short-term reversal in carry trades, which have given generally positive returns in Asia in 2014. As market participants look to close these positions into the end of the year, those previously strong regional performers have borne the brunt of US dollar buying," HSBC wrote in its report.
However, such carry trades could resume in January, said Samir Lodha, managing director at QuantArt Market Solutions. Much depends on what the US central bank decides on interest rates.
“It is now the US Fed (Federal Reserve) that will decide the future course of rupee-dollar. If the Fed says rate cuts need not be hurried, considering the low oil prices, rupee can again gain ground. However, if the rupee continues to decline, the Reserve Bank can be expected to intervene to support the currency," said Lodha, adding that if RBI doesn’t sell dollars, there could be some nervousness in the market.
US Fed officials will decide this week whether to make a critical change to their policy statement that would widen the door for interest rate hikes next year, Reuters reported.
The rupee on Monday also came under pressure after the latest numbers showed that inflation is cooling down rapidly in the country. Retail inflation measured by the Consumer Price Index (CPI) eased to 4.38% in November, compared with 5.52% a month ago, as vegetable prices fell 6.97%. Wholesale inflation for the same period came in at 0%, from 1.77% in October, data released on Monday showed. Even though the central bank is primarily looking at CPI inflation, Wholesale Price Index readings may prompt the central bank to cut rates soon, putting some more pressure on the local exchange rate.
An expectation of an imminent rate cut, following favourable inflation data, could also have worked against the exchange rate on Monday, dealers said.
India’s benchmark equity index, the S&P BSE Sensex, ended at 27,319.56 points, down 0.11%. The Sensex has corrected 4.34%, or 1,240.06 points, since 1 December, with FIIs selling $141.49 million worth of equities in the last three days.
The yield on India’s 10-year benchmark bond closed at 7.834% compared with its Friday’s close of 7.869%. Bond yields and prices move in opposite directions. It touched a low of 7.78%—a level last seen on 15 July 2013.
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