The 10-year government bond yield fell on rising bets for deeper interest rate cut
The currency opened at 71.97 and touched a low of 72.40 a dollar
The Indian rupee on Tuesday closed at a more than nine-month low against the dollar after economic growth slowed to a six-year low, stoking concerns of further outflows from domestic equity markets.
The 10-year government bond yield fell on rising expectations of a deeper interest rate cut.
The local currency closed at 72.39 against the greenback—a level last seen on 13 November 2018—down 1.36% from the previous close of 71.41. The local currency opened at 71.97 and touched a low of 72.41 a dollar during the day.
The 10-year government bond yield was down 4 basis points to 6.521% compared with Friday’s close of 6.559%. With the June quarter GDP growth significantly lower than the Reserve Bank of India’s estimate, expectations of an additional 50 basis points cut in the repo rate are stronger as the RBI policy is now anchored towards narrowing the output gap, said brokerage Emkay Research.
The weakness in the currency comes at a time when the government has little fiscal room to boost the economy with tax revenues lagging behind estimates. Even a record ₹1.76 trillion payout by the central bank to federal coffers last week failed to excite the markets. Foreign funds pulled out $2.3 billion from Indian stocks in August, the biggest outflow since October 2018.
On the global front, a trade war has escalated between the two biggest nations. First the US slapped 15% additional tariff on Chinese imports; then China retaliated by imposing tariffs on $75 billion worth of US goods.
“Global uncertainties have spooked investors which have led them to dump riskier assets. Therefore, as long as the global turmoil sustains, it’s difficult for the rupee to defend itself and show sustenance in the strength. Hence, rupee seems to have resumed its depreciation course after having taken support near 71.40 levels thrice in the past," said Amit Pabari, managing director, CR Forex Advisors.
According to Vaqarjaved Khan, an analyst at Angel Broking, the rupee is likely to depreciate further to 73.5 by the end of September if the trade war escalates and outflows from equity market continues.
Data released on Friday showed that India’s gross domestic product (GDP) grew 5% in the June quarter, missing the 5.7% median estimate of a Bloomberg poll. In the March quarter, the Indian economy had grown 5.8%.
“The continuing negative global cues, the raging tariff war between the US and China, and the likely sluggishness in the economic fortunes of economies around the world have also been behind the rout in the markets here, as well as elsewhere. Weak domestic consumption, especially rural consumption, has resulted mainly from low employment levels and non-availability of finance, which are issues that call for immediate measures to salvage the situation," said Joseph Thomas, head of research at Emkay Wealth Management.
On the domestic front, the BSE benchmark Sensex crashed nearly 769.88 points, or 2.06% lower, to close at 36,562.91. The broader Nifty sank 225.35 points, or 2.04%, to settle at 10,797.90. The Sensex fell the most since October, with just two of the 31 index members rising, and Reliance Industries Ltd contributing the most to the decline. From the beginning of the year, Sensex has gained 1.37%, while the Nifty has fallen 0.6%.
The domestic currency depreciated by 3.65% against the dollar in August, its steepest monthly decline in six years, making it the second worst-performing Asian currency for the month.
India’s current account deficit (CAD), which is a major contributory factor towards currency exchange rates, widened to $57.2 billion, or 2.1% of gross domestic product, in FY19, from 1.8% a year ago, amid a general slowdown in the economy.
A weak rupee makes imports costlier, negatively affecting CAD.