Rupee in Worst Losing Streak in Year on Brexit, Rajan Concerns

  • Indian rupee is 2016’s worst Asian currency after yuan
  • Sovereign bonds gain in June as inflation concern ebbs

The rupee completed its longest stretch of monthly losses in a year as global funds exited local bonds amid the uncertainty created by Brexit and central bank Governor Raghuram Rajan’s decision to leave the central bank.

The Indian rupee’s third straight month of declines was spurred by its biggest loss in 10 months on June 24 as the U.K. voted to quit the European Union. Foreign funds have reduced their holdings of rupee debt by 68.3 billion rupees ($1.01 billion) in June, the biggest outflow since February, National Securities Depository Ltd. data show. 

Asia’s second worst-performing currency this year also came under pressure following Rajan’s announcement June 18 that he’d leave when his term at the Reserve Bank of India ends in September, triggering concern about the continuity of policies aimed at targeting inflation and stabilizing the currency.

“Surging risk-aversion due to Brexit and earlier concern about Rajan’s departure weighed on the rupee,” said Abhishek Goenka, chief executive officer at India Forex Advisors Pvt. in Mumbai. The rupee will be on a weaker footing going forward as risk-off sentiment will probably pick up again, he said.

The rupee retreated 0.4 percent in June and 1.9 percent this quarter to 67.5250 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. It rose 0.2 percent on Thursday. The currency has weakened 2 percent in 2016, Asia’s worst performer after the Chinese yuan.

Nomura Holdings Inc. reduced its year-end rupee forecast to 69.5 per dollar on June 24, compared with an earlier expectation of 67.6, while Standard Chartered Plc sees it weakening to 68 per dollar, compared with an earlier call of 67.50. Mizuho Bank Ltd. predicts the currency will weaken beyond 70 in the next three months.

Sovereign bonds have gained this month as the prospect of good monsoon rains eased concern about higher food costs. Investors are drawing comfort from this year’s forecast for the highest rains since 1994 after the nation’s first back-to-back drought in almost three decades hurt crops.

The yield on benchmark notes due January 2026 fell two basis points in June to 7.45 percent, according to prices from the central bank’s trading system. The yield rose one basis point Thursday.

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