Govt proposals fail to calm markets; rupee, stocks continue slide3 min read . Updated: 17 Sep 2018, 11:25 PM IST
Stocks were also hit as Goldman Sachs changed its investment view on Indian equities from overweight to marketweight
Mumbai: The rupee continued its downward spiral on Monday, brushing off finance minister Arun Jaitley’s package of measures to restore confidence in the currency as traders judged them as inadequate to arrest the decline.
In the absence of steps that will provide immediate support, the government’s efforts failed to prop up the battered currency.
The rupee weakened 0.9% to 72.51 a dollar from its previous close of 71.86. The currency opened at 72.49 a dollar on Monday and touched a low of 72.69 in intra-day trading, despite the government’s five-point plan, which was announced on Friday, to boost capital inflows and shrink the widening current account deficit.
Friday’s announcement included steps to support the currency, relaxing overseas borrowing restrictions on manufacturers, a review of hedging requirements on foreign currency borrowings by infrastructure companies, removal of withholding tax on masala bonds (rupee-denominated bonds sold overseas) and easing the cap that limits foreign investment in corporate bonds. To address concerns over an expanding current account deficit, the government also announced steps to cut down non-essential imports.
Given the build-up of expectations about the weekend meeting, the policy response probably disappointed market participants, said a Nomura Global markets research note to clients.
“The government’s announcement measures are not short-term measures, which could have an immediate impact on the rupee. There needs to be a significant change in sentiment," said the treasury officer of a state-run bank.
According to Moses Harding John, a former chief executive of India and East Africa at SBM Holdings and currency expert, the initial disappointment of not getting a big-bang reform announcement pushed the rupee to 72.69 per dollar in Monday’s trade. “It will take time till the sentiment improves. Interest rate actions should be enough to bring order in the market," he said. “Big-bang measures will accelerate foreign outflows. So, a neutral mode will be a better way. No action or a big-bang action will only add to volatility and the current cautious mode will emerge as prudent and sensible stance over short to medium term."
The 10-year bond yield closed at 8.098%, from its previous close of 8.127%. Bond yields and prices move in opposite directions. The Reserve Bank of India’s announcement to conduct open-market operations of ₹ 10,000 crore on 19 September helped improve market sentiment.
Stocks were further beaten down as Goldman Sachs, over the weekend, changed its investment view on Indian equities from overweight to marketweight. The downgrade came on the back of stretched valuations, macro-economic concerns, a slow-down in domestic institutional inflows and political uncertainty due to impending general elections.
BSE’s benchmark 30-share Sensex shed 505.13 points, or 1.33%, to close at 37,585.51, while National Stock Exchange’s 50-share Nifty dropped 1.19% to close at 11,377.75.
“The decline (in equity markets) today is more to do with the currency behaviour and the resultant withdrawal. Weak Asian peers also impacted the sentiment," said Deven Choksey, group managing director, KR Choksey Investment Managers Pvt. Ltd.
“The government measures announced on Friday are well-intended, but can only give results over next one year, and fail to provide immediate relief. We need measures that can provide immediate relief," Choksey said. “The equity market will continue to be volatile as long as currency continues its downward trajectory," he added.
Foreign institutional investors (FIIs) have been net sellers of Indian shares for five of the first eight sessions to 12 September, selling a net of $187.63 million in the period. Domestic institutional investors have been buyers of Indian shares since the start of September to Friday, pumping in a net of Rs. 2,284.39 crore in the period.
Only three sectoral indices managed to close higher on Monday. BSE Finance index and BSE Energy index fell the most, down 1.44% and 1.30% respectively.
Energy conglomerate Reliance Industries Ltd and financials contributed the most to the decline in the Sensex. Reliance Industries fell 2.12%. Mortgage lender Housing Development Finance Corp. Ltd dropped 2.47% while private lender HDFC Bank fell 1.81%.