Mumbai: Indian markets, rupee and bond prices slumped today after exit polls showed that the ruling Bharatiya Janata Party (BJP) is likely to face defeat in Rajasthan while it faces close contest in Madhya Pradesh and Chhattisgarh from rival Congress party.
Exit polls on Friday suggested that the Congress is projected to wrest power in Rajasthan with an absolute majority. In two other BJP-ruled states, Madhya Pradesh and Chhattisgarh, the exit polls predict a close fight with Congress.
The Sensex was trading at 35169, down 503 points, or 1.33%, while the Nifty stood at 10,550, falling 138 points, or by 1.3%. Rupee was trading at 71.36 a dollar, down 0.78% from its Friday’s close of 70.81. The currency opened at 71.31 a dollar. The 10-year government bond yield stood at 7.5% from its previous close of 7.464%. Bond yields and prices move in opposite directions.
Asian markets were weak today after trade data released by China over the weekend showed that the trade dispute with the US is weighing on its economy. US President Donald Trump’s trade team sought to insulate talks with China from a growing dispute over the US pursuit of a Huawei executive on Sunday, but struggled to address concerns that a fragile truce with Beijing was at risk. China summoned the US ambassador to China in protest over the arrest of the Huawei CFO.
Markets were under pressure also after soft US payrolls data fuelled speculation that the Federal Reserve may stop raising interest rates sooner than previously expected. US non-farm payrolls increased by 155,000 jobs last month, below economists’ median forecast of 200,000 jobs.
Rupee and Bond prices were under pressure also due to wider current account deficit and surge in crude oil prices. India’s current account deficit widened to $19.1 billion or 2.9% of gross domestic product (GDP) in July-September period, from $15.9 billion or 2.4% of GDP in the April-June quarter and 1.1% of GDP in the year ago period, according to data released by the Reserve Bank of India (RBI). That gap was lower than a median $19.9 billion deficit predicted in a Bloomberg survey of 12 economists.
Crude oil extended its gains near $62 a barrel after organization of the petroleum exporting countries (OPEC) coalition delivered a bigger-than-expected oil production cut, defying President Donald Trump’s calls for the group to lower prices. Iran gave OPEC the green light on Friday to cut oil output by around 0.8 million barrels per day (bpd) from 2019. OPEC will later ask non-OPEC producers to contribute an additional 0.4 million bpd to the cuts.
“Markets are edgy ahead of the state elections result on December 11, especially as the exit polls presented a confused picture in Madhya Pradesh and Chhattisgarh. This, in conjunction with surprise breakthrough in OPEC+ production cut, has lent renewed support to Brent, weighing further on INR", said Edelweiss Securites in a 7 December note.
“Additionally, the fate of Brexit parliamentary vote on December 11 would add another layer of uncertainty in FX space globally. While the outcome of India’s state elections would decide near-term INR direction, we remain watchful of unwinding of global events, including that of the US FOMC December policy, which could see Fed further reinstating data dependency-led reaction function ahead", Edelweiss report added.
Edelwiess report says that this could weaken USD at the margin, it may also mean more volatility in 2019 and may not necessarily be a good thing for risk assets, including rupee assets. Besides, risk of global slowdown (emanating from or including US) could actually make dollar a contracyclical bet in FX space, despite a more dovish Fed in 2019.
With Agency Inputs