Rupee posts biggest one-day fall in 20 years

Mumbai: Panic selling caused the biggest single-day decline in 20 years in the value of the rupee on Wednesday en route to another historic low, sparking warnings that the economy was on the brink of a full-blown crisis.

add_main_imageEscalating tension in the Middle East and rising crude oil prices conspired with domestic economic worries to extend the rupee’s decline against the dollar this year to 20%, with no bottom visible yet.

“The market is in a super-panic stage,” said Samir Lodha, a senior partner at QuantArt Market Solutions Pvt. Ltd in Mumbai.NextMAds

The rupee slumped to a lifetime closing low of 68.83 per dollar after touching a new lifetime low of 68.85. Its decline by 3.83% in percentage terms is its biggest daily fall since 1 March 1993. The decline in absolute terms, by ₹ 2.64, is the steepest since 4 July 1991.

This month’s 8.13% surge in oil prices on concerns about possible US-led Western military action against Syria threatens to worsen the current account deficit for India, which imports 80% of its oil requirements. On Wednesday, Brent crude was trading at $115 a barrel, up 1.08%.

The resurgence in crude oil prices comes on top of economic concerns including sluggish growth, inflation and high borrowing costs. Worries that the US Federal Reserve is close to winding-down its economic stimulus have forced investors to flee to dollar assets.

“There is no stop to this any time soon,” said Abhishek Goenka, chief executive officer of India Forex Advisors Pvt. Ltd. “At this pace, I wouldn’t be surprised if we see rupee trading in 70s soon.”

Heavy dollar demand in the foreign exchange market negated the impact of intervention by the Reserve Bank of India (RBI) to support the rupee, dealers said.

“Downward pressure on asset prices is unlikely to abate until the rupee becomes decisively cheap, maybe weaker than 70, or the authorities deliver ‘shock and awe’ tightening,” he said.

BNP Paribas on Wednesday slashed its economic growth forecast for India for the fiscal year to March 2014 to 3.7% from 5.2%—the weakest growth rate since 1991-92, when India buckled under a balance of payments crisis that required a loan from the International Monetary Fund to bail out the country.

India is due to post April-June gross domestic product data on Friday, with analysts estimating the economy grew at an annual rate of 4.7%, roughly in line with the previous quarter.

“The endgame for the current decline would be the day the rupee stops falling, alongside government measures like a substantial diesel price hike,” said Samir Arora, a fund manager at Helios Capital in Singapore.

On Wednesday, offshore traders were seen betting heavily against the rupee. The one-month offshore non-deliverable forward contract was quoted at 69.73 and three-month at 71.04 compared with 69.37 and 70.40, respectively, in the onshore forward market.

“RBI’s interventions may help in arresting the fall, but the gains will not sustain unless sentiments reverse,” Goenka of India Forex said.

On Wednesday, RBI opened a forex swap window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs) —Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd.

Under the swap facility, RBI will sell and buy dollar-rupee forex swaps for a fixed tenor with OMCs through a designated bank. The swap facility will get operationalized with immediate effect and will remain in place until further notice, RBI said.

Dealers said any respite for the Indian currency will be possible only if exporters begin to sell dollars, but there aren’t any signs of that happening yet.

The 10-year benchmark bond ended at 8.966%, from its previous close of 8.735%, and after touching a high of 9.029%. Higher bond yields push up the cost of borrowing for the government and further hamper its finances.

Bond yields jumped despite the central bank’s plan to infuse another ₹ 8,000 crore in the banking system by buying back bonds on Friday.

Repeated assurances from the government that it is in control of the fiscal situation haven’t helped, dealers said.

Foreign institutional investors “are taking their money back home. There are fears about the external situation. Primarily, this is a panic situation that is impacting the sentiments in the market”, said N.S. Venkatesh, treasurer at IDBI Bank Ltd.

Foreign investors have sold nearly $1 billion of Indian shares in the eight sessions through Tuesday—a worrisome prospect given that fund inflows into stocks had been India’s one sturdy source of capital inflows in the first half of 2013.

The current turbulence in emerging markets is driven largely by uncertainties around the timing of lowering bond purchases by the Fed, coupled with recent cuts in Asian economic growth forecasts, most notably for China, rating company Standard and Poor’s (S&P) said.

Although the road may be rocky in the near term, particularly for countries such as India and Indonesia that have the largest current account deficits in the region, “we don’t think this is the Asian crisis all over again”, Paul Gruenwald, S&P’s chief economist for Asia-Pacific, said in a statement.

That crisis in 1997-98 resulting from speculative attacks on currencies felled rapidly growing economies, including Thailand, Malaysia, Indonesia and South Korea.

“The external positions for the emerging Asian economies are much stronger. The central banks are also not defending their exchange rates,” Gruenwald said. “In addition, the increase in leverage over the past five years has been moderate in the economies with high external risks.”

BSE’s benchmark index, the Sensex, recovered its early losses to end the day 0.16% higher at 17,996.15 points, after falling by as much as 519 points, or 2.89%, in intra-day trading.

Dealers said state-owned Life Insurance Corporation of India, the top investor in Indian shares, was seen buying equities.

The broader 50-share Nifty index of the National Stock Exchange (NSE) ended at 5,285 points, down 0.05%, after falling 168 points, or 3.19% in intra-day trading..

NSE’s Volatility Index, a measure of market volatility, touched an intra-day high of 36.02, the highest since October 2011. It closed the day 10.06% higher at 32.38.

“Things don’t look good in the near term. Long-only funds have given up on India and many of them are underweight on Indian equities. They are not even looking at India at this point in time,” said Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services Ltd.

Most Asian equity indices closed in the red, with the exception of Indonesia and Taiwan. The Nifty has declined 10.5% year to date and is the worst performing Asian stock index in 2013.

Bloomberg and Reuters contributed to this story.