Mumbai: The rupee on Monday closed at a fresh 39-month low against the US dollar, amid nearly $5 billion outflows from foreign institutional investors (FIIs) in local equity and bond markets since the government announced the demonetisation scheme.
The FIIs are selling local as well as other emerging market assets on rising expectations of a possible US interest rate hike in its next mid-December policy and as speculation mounts that US president-elect Donald Trump’s reflationary policies will mean a quicker pace of monetary tightening by the Federal Reserve. The concern that he will take a more protectionist approach to trade has also weighed on developing-nation assets.
Rupee closed at 68.78 a dollar, down 0.44% from its previous close of 68.47. The home currency opened at 68.43 against the US dollar and touched a low of 68.80 a dollar. So far this year, it has fallen 3.81%.
Barclays expects that the currency volatility could increase and liquidity could become scarce during bouts of market risk aversion and dollar strength, as the market tests the new Reserve Bank of India (RBI) leadership’s tolerance for weakness in the rupee.
“Unless the RBI hints at greater tolerance of larger rupee depreciation, we continue to hold a constructive medium-term view on the INR and see it as one of the most resilient EM currencies in a strong dollar environment. Potential anti-immigration and anti-trade policies in the US would not bode well for developing economies, and the dollar likely would strengthen next year—particularly against EM currencies. Rupee is unlikely to ‘escape the beta’ (to the USD) and likely also would drift higher as the rest of USD/EM FX adjusts, especially if the market sees the RBI as continuing to be less tolerant of rupee appreciation than it is of rupee depreciation,” said Barclays report.
India’s benchmark Sensex index closed at 26,350.17 points, up 0.13% or 33.83 points from its previous close. So far this year, it rose 0.89%.
Traders are also cautious ahead of the key gross domestic product (GDP) data which will be released on 30 November. According to Bloomberg estimates, GDP will be 7.6% for the September quarter from 7.1% in the June quarter.
Bond yields gained after the RBI on Saturday unexpectedly ordered banks to deposit their extra cash with it, in a bid to absorb excess liquidity generated by the government ban on larger banknotes.
The central bank said banks would need to transfer 100% of their cash under the RBI’s cash reserve ratio from deposits generated between 16 September and 11 November, saying it was a temporary measure that would be reviewed on or before 9 December.
Traders called it a drastic move intended to dent the rally in bond markets, adding that the RBI could have opted for more modest measures such as sucking out some of the liquidity through sales of market stabilisation bonds or telling banks to park funds under reverse repos, Reutersreported.
The benchmark 10-year government bond yield gained 9 basis points, to 6.327%, compared to Friday’s close of 6.233%. Bond yields and prices move in opposite directions.
So far this year, FIIs have bought $4.57 billion in equities and sold $3.02 billion in debt.
Most Asian currencies advanced as the dollar index and US treasury yields dropped, while oil prices declined after a planned meeting on Monday between OPEC and non-OPEC producers was cancelled.
Japanese yen was up 0.819%, South Korean won 0.598%, Taiwan dollar 0.529%, China renminbi 0.149%, Thai baht rose 0.135%, Singapore dollar 0.007% and China offshore 0.095%. However, Malaysian ringgit was down 0.121%, Indonesian rupiah 0.052% and Hong Kong Dollar down 0.003%.
The dollar index, which measures the US currency’s strength against major currencies, was trading at 100.32, down 0.17% from its previous close of 101.49.