On Monday, India becomes a focus for emerging market. After the months of managing to stay on the circumference. The Indian rupee is the worst performing emerging markets currency, declining 11% year to date against the dollar.
A financial official ministry said, “India might consider selling deposits denominated in foreign currency to non-resident Indians to shore up the currency. While this statement did help tamp down selling pressure temporarily, no official confirmation was available at the time of going to press”.
On Friday, the data was released as an immediate trigger for the downfall of markets, which showed India’s current account deficit had widened to 2.4% of gross domestic product (GDP) in the April-June period. On the back of rising crude oil prices, from 1.9% of GDP in the preceding three months. For the April-June period, the amount deficit stands for $15.8 billion and it is the most in 5 years. Trade deficit widens in July to make the matters worst, again due to oil imports, which stoked fears of a further deterioration in the current account deficit.
The rupee ended at 72.45 a dollar, down 0.97% from Friday’s close of 71.74. It opened at 72.11 per dollar. The benchmark 10-year bond yield settled at 8.158%, a level last seen on 25 November 2014, up from its previous close of 8.03%. Bond yields and prices move in opposite directions. In equities, the benchmark 30-stock Sensex fell 1.22%, the sharpest one-day loss in six months.
“There are only five major EM countries running a basic balance deficit and India is one of these. This gap has been weighing on the rupee (down 12% CY18 year to date), and we expect these pressures to sustain in FY19/20,” Tanvee Gupta Jain, an economist at UBS Securities, said in a report. “We revise our FY19 CAD forecast to 2.7% of GDP in FY19 (from 2.5%), much above the sustainable threshold. This would put India’s overall BoP (balance of payments) in a deficit of around 1% of GDP, the first in seven years.”
According to the report of Citi Bank Wealth Management of 10th September, over next months it saw a further weakening of emerging market currencies. Another report from ING expected the rupee-dollar to trade in the 74-75 area over the next six months. The report also said that growth could potentially slow as the current market uncertainty filters through to economic activity.
On Monday, Moody’s Investors Service released a report that has mentioned a sustained weakening of the rupee would be credit negative for its rated Indian companies, particularly those that generate revenue in rupees but rely on dollar debt to fund their operations and have significant dollar-based costs, including capital expenses.
So far in this year, foreign investors have sold $424.8 million in equities and $6.25 billion in India debt. The central bank data shows the Reserve Bank of India (RBI) sold $6.18 billion of foreign currency in June and $5.8 billion in May to protect the rupee.
Paresh Nayar, the Mumbai-based head of currency and money markets at FirstRand said, “Rupee closing of 72.45 to the dollar is not a comforting situation for market participants. The statement from the finance ministry official that they are looking at NRI (non-resident Indian) bonds is a comforting move for dollar-rupee and liquidity”.
With the straight depreciation in the rupee and interruption by RBI in the forex market, the chances of a rate hike have also increased. The central bank had earlier hiked key policy rates by 25 basis points each at its June and August bimonthly review to 6.5%.
Siddhartha Sanyal, chief India economist, Barclays, said in a report,” Recent INR depreciation poses risks to our monetary policy view of a long pause. However, we do not expect sharp monetary tightening to combat the currency move. In similar periods of INR weakness, such as Q3 13, we believe aggressive tightening was ineffective, if not counterproductive, in combating the INR’s fall”.