Mumbai: The rupee dropped to a historic low of 71 to the dollar as global factors on Friday overwhelmed expectations of strong economic growth data. The rupee’s fall spooked bond investors as well, given the implications of a depreciating currency on inflation and therefore on interest rates.
The rupee closed at 70.995 a dollar, down 0.37% from its previous close of 70.74 and the 10-year benchmark bond yield rose to settle at 7.95%.
Bond yields could rise further next week as a strong first quarter GDP (gross domestic product) growth raises the odds for a policy rate hike.
The GDP data, released after market hours, showed that the economy grew at a brisk pace of 8.2% in the June quarter, higher than market estimates.
The Bloomberg median estimate of 39 economists for GDP growth for Q1 was 7.6% compared with 7.7% in the March quarter. Gross value added was estimated at 7.5% by Bloomberg.
GDP grew at 5.6% in the same quarter of last year, following the implementation of the goods and services tax.
The 10-year bond yield stood at 7.952% on Friday, from its Thursday’s close of 7.931%. Bond yields and prices move in opposite directions.
A bullish GDP with growth closer to 8% is negative for the bond markets as expectations of a rate hike increase, said Ashutosh Khajuria, executive director and chief financial officer at Federal Bank. “I believe anything above 7.7% (GDP growth) is going to put pressure on bond yields," he said.
The rupee has lost 9.98% since the beginning of this year, becoming the worst performing Asian unit. The sharp depreciation has made imports expensive and could widen the current account deficit in the coming quarters lest exports revive in a big way. Market participants forecast the rupee to remain weak for the rest of the year.
Khajuria said that the rupee is expected to remain within the range of 70.5-71.5 against the dollar. “When the speculative bets increase, the momentum takes it beyond what it deserves and that could be happening with the rupee right now. If you compare today’s levels with that of five years ago, there is about 7% depreciation in the value," he said.
Anindya Banerjee, foreign-exchange analyst at Kotak Securities, said the rupee is taking cues from oil as Brent is hovering close to $78 a barrel. According to traders, the rupee’s drop spurred dollar-selling by state-run banks, probably on behalf of the central bank, but this could not curb the losses. The Reserve Bank of India’s (RBI’s) interventions have not been significant in the forex market, traders said.
There is a lot of uncertainty on how the currency is likely to settle, how the liquidity in the system is likely to be and whether any intervention is required from RBI, according to Ajay Manglunia, head (fixed income advisory) at Edelweiss Financial Services.
“At present we are seeing limited intervention from the central bank and the rupee is settling down by itself. The rupee is being driven more by global sentiments as the US dollar has been strengthening globally," he said.
The Dollar Index, which measures the US currency’s strength against major currencies, was trading at 94.792, up 0.07% from its previous close of 94.723.
Manglunia said global trade disputes and rising crude oil prices are also affecting bond yields. Bond yields have risen 142 basis points (bps) in the last one year, as against a 50 bps hike in the central bank’s policy rate in the same period.
Meanwhile, foreign investors have sold $342.57 million and $8.08 billion in equity and debt markets in 2018, respectively.
The benchmark Sensex was down around 45 points at close. Since January, it has gained over 13.47%.
Asian currencies were trading lower. The South Korean won lost 0.389%, Singapore dollar 0.248%, Indonesian rupiah 0.204%, Taiwan dollar 0.101%, Philippine peso 0.086%, Malaysian ringgit 0.085% and Hong Kong dollar 0.001%.