Rupee Sinks Most Since August as Brexit Raises Risk of Outflows

  • State-run Indian banks sold dollars on behalf of RBI: traders
  • Rupee down 2.7 percent this year in Asia’s worst performance

India’s rupee fell the most in ten months as the United Kingdom voted to quit the European Union.

A so-called Brexit brings uncertainties for global growth that could curb appetite for assets in emerging markets like India and exacerbate losses for the rupee, already Asia’s worst-performing currency this year. The U.K. leaving the EU could also worsen a slump in Indian exports given the nation’s $14 billion trading ties with Britain. State-run banks were seen selling dollars on behalf of the Reserve Bank of India, according to two Mumbai-based traders.

The Indian currency slumped 1.1 percent to 67.97 a dollar in Mumbai, the biggest loss since August, according to prices from local banks compiled by Bloomberg. It sank to 68.2150 earlier, the lowest level since March 1. The rupee has weakened 2.7 percent in 2016, while India’s overseas shipments have slumped for 18 straight months.

“The selloff in global markets will obviously have an impact on the rupee,” said Anindya Das Gupta, Mumbai-based head of local markets trading at Barclays Bank Plc. “We would expect the RBI to keep a close watch on markets and intervene to control excessive volatility.”

The negative risk backdrop and weak equities should raise depreciation risks for the Korean won, Taiwanese dollar and rupee, Nomura Holdings Inc strategists including Craig Chan in Singapore wrote in a report. Nomura cut the rupee’s year-end forecast to 69.5 per dollar, compared with an earlier expectation of 67.6.

The RBI “is continuously maintaining a close vigil on the market developments, both domestically and internationally, and will take all necessary steps, including providing liquidity support (both dollar and rupee), to ensure orderly conditions in financial markets,” Governor Raghuram Rajan said in a statement. The central bank is ready with all the ammunition, he said during a conference call with reporters.

History shows the rupee tends to underperform in periods of weak global risk appetite. The currency sank 2.4 percent in January, the most in Asia, when concern over slowing global growth and China’s weakening of the yuan roiled financial markets worldwide. In 2013, Morgan Stanley included the rupee among the “Fragile Five” currencies along with South Africa’s rand, Indonesia’s rupiah, Turkey’s lira and Brazil’s real, as the Indian currency sank to a record while plunging 18 percent over four months.

The rupee has dropped 1.3 percent this week as foreign holdings of local-currency bonds fell following Rajan’s announcement last weekend that he’d leave when his term ends in September. A gauge of the rupee’s one-month implied volatility jumped 116 basis points to 7.98 percent, data compiled by Bloomberg show.

Rajan’s impending departure has fueled concerns about stability in India’s bond and currency markets given his success in curbing rupee volatility and controlling inflation. Overseas holdings of local government and corporate debt slipped by 43.3 billion rupees ($637 million) in the four days through Thursday, set for the biggest weekly drop since the period ended May 20, National Securities Depository Ltd. data show.

The S&P BSE Sensex index of Indian shares plunged 2.2 percent, the biggest decline since February. The yield on sovereign bonds due January 2026 fell one basis point to 7.47 percent in Mumbai, prices from the central bank’s trading system show.

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