Mumbai: The rupee breached the 66-per-dollar level to hit a new lifetime low on Tuesday, posting its biggest single-day percentage fall in 18 years, and stock markets tumbled, on global cues and as investors fretted about the impact of the proposed food security law on the government’s subsidy bill and fiscal deficit.
A day after the Lok Sabha passed the food security Bill, expected to cost the government some Rs.1.3 trillion a year, the rupee ended at Rs.66.19. It lost 2.84% on the day—the steepest daily decline since February 1996. In absolute terms, the dollar rose Rs.1.84, the biggest gain since March 1993.
Assurances by finance minister P. Chidambaram that the fiscal deficit would be kept in check and not allowed to overshoot the targeted 4.8% of gross domestic product (GDP) failed to calm investors. “The red line will not be breached,” Chidambaram said.
In a Monday night meeting, the cabinet committee on investment cleared 36 projects entailing investment of Rs.1.83 trillion, but the announcement had no reassuring impact on the markets.
In Parliament on Tuesday, Chidambaram batted for more reforms, less restrictions and a more open economy to overcome the current economic crisis. Charting a 10-point agenda to revive the levers of the economy, Chidambaram said the immediate priority of the government is to contain the fiscal deficit and the current account deficit (CAD) in the current fiscal. “We will contain fiscal deficit at 4.8% of GDP and CAD at $70 billion this year,” he said.
Besides domestic factors, the rupee tracked weakness in most Asian currency and stock markets, dealers said. Most Asian currencies were down on Tuesday, with the Indonesian rupiah dropping 4.31%, the Malyasian ringgit 0.61% and Philippines’s peso 0.77% on Tuesday. Most Asian stock markets, too, declined, with the Philippines stock barometer losing 3.96% and the Indonesian benchmark falling 3.71%.
“The impact on the government’s finances when they implement the food security Bill is a big concern to the market and a negative for the markets,” said Ashish Vaidya, head of fixed income, currency and commodity trading at UBS India. “At this pace, rupee, possibly, is fast approaching the tag of the worst performing currency in the world.”
The rupee, Asia’s worst performing currency this year, has lost 7.54% against the dollar in the past two weeks and 17% since the start of January, en route hitting a series of record lows. Speculation that the US Federal Reserve may soon start winding up its economic stimulus programme, adding to concerns about the domestic economic slowdown, has prompted overseas funds to head for the exit doors.
Dollar-based investors have lost 23% from BSE’s bechmark Sensex shares this year, data compiled by Bloomberg shows.
Bond yields, gold price rise
The rupee came under severe pressure on Tuesday, mainly on concerns about the impact of the food security Bill, which seeks to supply subsidized foodgrain to 67% of India’s population. Under the proposed law, each beneficiary will be entitled to 5kg of rice, wheat and coarse grains at the subsidized price of Rs.3, Rs.2, and Rs.1 per kg, respectively. Analysts expects the scheme to increase India’s fiscal deficit.
Bond yields rose to 8.73%, down from Monday’s close of 8.332%, reflecting the negative sentiment in currency and equity markets. Bond prices and yields move in opposite direction. Domestic gold prices rose to an all-time high of Rs.32,694 per 10gm, up 2.45% from the previous close.
“The rupee is likely to continue to be under pressure, given rising gold and oil prices,” Dariusz Kowalczyk, a senior economist at Credit Agricole CIB in Hong Kong, said in an email interview.
“Any major dip in the dollar-rupee exchange rate should be seen as a buying opportunity for the pair given lack of sufficient measures that would turn around India’s weak fundamentals.”
Concern that India’s CAD will worsen as oil prices climb amid political tensions in the Middle East exacerbated the fall. The US said on Monday that President Barack Obama will hold Syria accountable for using chemical weapons against its people, fanning concern unrest in the region will disrupt fuel supplies. Brent crude prices have climbed 3% in August, raising import costs for India, which depends on exports for meeting nearly 80% of its oil requirements.
“The trinity of fiscal deficit, slowing growth and an unstable currency is hitting us badly. In addition to these, the government has passed the food security Bill, which may put fear in the minds of rating agencies,” said G. Chokkalingam, managing director and chief investment officer at Centrum Wealth Management in Mumbai.
Indeed, the depreciation seems likely to continue. Three-month onshore rupee forwards fell 2.79% to 67.74 per dollar.
Stock prices hammered
“The sharp fall in the rupee is what’s worrying investors the most,” said Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments Hong Kong Ltd, which has $40 billion in equities. “Most foreigners are overweight on India and their risk managements’ are actively questioning the huge overweight position.”
The BSE’s benchmark Sensex lost 636 points in intra-day trade—its biggest daily loss in a week—while the 50-share Nifty index of the National Stock Exchange (NSE) dropped 202 points. The Sensex closed 590.05 points, or 3.18%, down at 17,968.08 points, while the Nifty dropped 3.45%, or 189.05 points, to end at 5,287.45 points.
“The No. 1 issue is currency—the fact that the government and the Reserve Bank are unable to contain the fall of the rupee. The food security Bill has added to the rupee’s woes,” said Gautam Trivedi, managing director and head of equities (India), Religare Capital Markets Ltd.
“I don’t see foreign investors’ interest (in Indian equities) at this point. A 5-8% decline from here will not surprise me,” Trivedi added.
“It’s not wise to take measures which add to that deficit on an ongoing basis,” Geoff Lewis, global market strategist at JPMorgan Asset Management in Hong Kong, said.
Overseas investors have sold about $810 million worth of shares in the previous seven sessions through Monday, with global sentiment weakening further amid uncertainty about the prospect of military action against the Syrian government.
Foreign investors have withdrawn a total of $1.8 billion from Indian equities and debt so far this month. They have been net sellers since June. This year’s net inflow stood at $11.8 billion, still the second largest among 10 Asian markets tracked by Bloomberg.
NSE’s Volatility Index, or VIX, a widely tracked measure of volatility in the stock market, soared 11.5% to a 20-month high of 29.42, hinting at choppy days ahead. All sectoral indices except for the BSE IT index closed in the red. Banking stocks were the hardest hit with the BSE Bankex declining as much as 5.7% to 10,074.94 points, a level last seen in January 2012 . It later closed 5.3% lower at 10,108.72 points, with all its 13 components declining.
Private sector lender HDFC Bank Ltd plunged 8%, the most in more than four years, and ICICI Bank Ltd 3.3%; top lender State Bank of India shed 2.4%. Mortgage lender Housing Development Finance Corp. Ltd declined 7.7%.
Bond yields inched up despite the Reserve Bank of India (RBI) announcing buyback of long-dated bonds on Monday evening to infuse Rs.8,000 crore of liquidity into the banking system. This is the second such buyback, known as an open market operation (OMO). Last week, RBI had infused over Rs.6,000 crore into the banking system through an OMO, giving some relief to cash-strapped markets and helping 10-year yield cool off from a record high of 9.47%.
Elizabeth Roche in New Delhi, Bloomberg and Reuters contributed to this story.