The Indian rupee on Wednesday closed at an over two-month low against the US dollar due to weak domestic economic data. Weakness in Asian peers, which fell on fresh doubts over the US-China trade deal, also weighed on the domestic unit.
The rupee closed at 72.09 a dollar today, a level last seen on 4 September, and down from Monday's close of 71.47. The Indian unit had opened at 71.78 a dollar. Indian financial markets were shut on Tuesday for Guru Nanak Jayanti.
India’s factory output contracted for the second straight month at 4.3% in September, recording its worst performance since the current series was launched in April 2012.
Given weak industrial production numbers, analysts expect the Indian economy to have grown at less than 5% in the September quarter. The gross domestic product data for September quarter is due on 29 November.
"We recently lowered our growth forecast to 4.9% y-o-y (from 6% earlier) in FY20 and to 6.1% (from 6.9%) in FY21. We attributed this to the economy presently reeling from a combination of a domestic credit stress due to the ‘triple’ balance sheet problem of corporates, banks and shadow banks, clogged policy transmission and weak global growth. This will likely result in a deeper trough and a prolonged phase of bottoming out of the growth cycle," said Nomura Research in a note to its investors.
"While headline inflation is likely to rise above 4% in near months, we expect the Reserve Bank of India (RBI) to look through the buildup in food price inflation, and deliver a 25bp of rate cut at its next policy meeting in December, followed by another 25bp rate cut in Q2 2020," it added.
The government will release consumer price index-based inflation and wholesale price index-based inflation data for October on Wednesday and Thursday respectively. According to a Bloomberg survey, CPI is likely to rise to 4.34% from 3.99% a month ago while WPI is expected to be at -0.22% from 0.33% a month ago.
In the year so far, the rupee has weakened 3.2%, while foreign investors have bought nearly $11.60 billion in Indian equities and $5.32 billion in debt.
The benchmark equity index Sensex fell 229.02 points or 0.6% to close at 40116.06 points. Year to date, it has gained 11.2%.
Meanwhile, government bond yields fell on expectation that the Reserve Bank of India may cut rates further after the slump in factory output. The yield on the 10-year government bond was at 6.532% compared with its previous close of 6.567%.
"The persistent slowdown in industrial growth may force RBI to go for another round of policy rate cut in months. However a possible rise of headline inflation above the medium term target of RBI (4%) may act as a point of caution before RBI does a rate cut," said Rahul Gupta, head of currency at Emkay Global Financial Services.
Other Asian currencies fell today as President Donald Trump said the US will increase tariffs on China if the first step of a broader agreement is not reached. South Korean won was down 0.546%, Malaysian ringgit 0.277%, Taiwan dollar 0.269%, Indonesian rupiah 0.178%, China renminbi 0.175%, Philippines peso 0.163%, Singapore dollar 0.081% and Hong Kong Dollar 0.056%. However, Thai Baht was up 0.294%, Japanese Yen 0.092% and China Offshore 0.004%.
The dollar index, which measures the US currency’s strength against a basket of major currencies, was at 98.362, up 0.05% from its previous close of 98.309.