Rupee hits new low, Sensex slides as Fed shakes up markets

Mumbai: The rupee plummeted to an all-time low as overseas investors stampeded out of markets all over the world, panicked by US Federal Reserve chairman Ben Bernanke signalling a tightening of monetary policy after almost five years of stimulus spending that began as a rescue measure after the 2008 global financial crisis.

add_main_imageBernanke said in the US on Wednesday night that the Fed could start scaling back stimulus spending later this year if the economy strengthened.

The rupee ended at a record 59.58 to the dollar on Thursday after touching an all-time intra-day low of 59.98. Only the intervention of the Reserve Bank of India (RBI) in the currency market prevented the rupee from breaching the pyschologically important 60-to-the-dollar mark, traders said. NextMAds

Meanwhile, India’s key equity indices slumped the most in 21 months as a slowdown in China’s manufacturing activity further spooked investor sentiment. The benchmark BSE Sensex fell 2.74%, or 526.41 points, to 18,719.29, its lowest close since 15 April. Investor wealth of around ₹ 1.5 trillion was shaved off listed stocks on the BSE on Thursday. Bond prices also fell sharply.

The government damage-control exercise was led by chief economic adviser Raghuram Rajan, who said in New Delhi that the rupee was not in “shambles”. The government, RBI and the capital market regulator, the Securities and Exchange Board of India (Sebi) were alert to the situation and would take action as needed, he said.

“We are not short of instruments ... We have a range of instruments to call on as and when needed, we will call upon them,” he said. “All options are open to us. We have to be very careful in thinking through options.”

He added that the government was taking steps to rein in the burgeoning current account deficit.

“We have a current account deficit which is large, but I believe we are on our way to tapering it... Gold imports are coming off their peaks,” he said. He ruled out any more curbs on gold imports, saying such a move wouldn’t be good for the overall health of the economy.

The rupee has lost 9.68% of its value against the dollar since 1 May with the US unit rising against all emerging market currencies. Only the South African rand (12%) and the Brazilian real (10%) have fallen more than the rupee.sixthMAds

Prospects for the recovery of growth in India dimmed considerably as the rupee and bond markets plunged into turmoil.

Bankers and economists see the inflationary pressure resulting from a weaker rupee, which makes imports such as fuel costlier, preventing the central bank from easing monetary policy further, although further reductions in interest rates are seen as essential in pulling growth out of the 10-year low that it fell to in the last fiscal year.

RBI has cut its repo rate, at which its lends to banks, by a total of 125 basis points (bps) since its current rate-cutting cycle began in April 2012. A basis point is 0.01 percentage point.

Economists had earlier predicted a 50-75 bps drop in the repo rate, most likely in the first half of the fiscal, but those predictions may not hold now.

Events in the last few days have “definitely” reduced chances of further rate cuts, said Samiran Chakraborty, regional head of research, India, Standard Chartered Plc.

“Bets for a rate in July are off for sure. RBI cannot cut rates with the rupee near 60 per dollar and nobody has a grip on what the currency will do in the next six months. The rate cut, if at all it happens, will be post September and unlikely to be more than 25 basis points,” Chakraborty said.

Saugata Bhattacharya, chief economist at Axis Bank Ltd, said “front loading” rate cuts is not an option for RBI currently.

“Both the intensity as well as the amount of cut will be lower. However, we have to yet see as to what impact the rupee depreciation has on imports and hence inflation. Anyway, statistically, the wholesale price inflation is set to increase since September-October, which will make a rate cut difficult then,” he said.

Jayesh Mehta, managing director and treasurer, global markets group at Bank of America, said the trajectory of US yields will be crucial for interest rates in India.

“If the US 10-year yield recovers to say 2.25% by late June or early July then RBI may take a call to cut rates but if it rises and settles at 2.75% then rate cuts will be impossible,” Mehta said.

Although the Sensex has declined in nine of 14 trading sessions so far in June, some investors remain positive on India.

The market decline was along expected lines, said Deven Choksey, chief executive officer and managing director, KR Choksey Shares and Securities Pvt. Ltd, who expects the “market should seek support at 5,650 (Nifty) levels and at that level we could see buying coming in from long-only funds”. The NSE fell 2.86% to 5,655.90 on Thursday.

“The worst could be over for India,” Sam Mahtani, director of emerging markets at F&C Investments, said in a phone interview from London. “There could be scope of a further 3-5% downside from here, but beyond that we do not see more deterioration.” Mahtani continues “to be positive on India, and we see buying opportunities in select quality stocks”.

Foreign institutional investors, or FIIs, have sold a net $324.3 million of Indian equities in June, after being net buyers in all the previous months in 2013.

They have pumped a net $14.8 billion into Indian stocks for year to date.

The 10-year 7.16% bond maturing in 2023 ended at 7.39%, up 13 bps from the previous close of 7.26%. Trade had to be halted for 30 minutes in the early hours to give bond dealers time to adjust to prices.