Rupee Plunge to Record Seen Damaging Economy; Bonds, Stocks Fall
India’s rupee plunged to a record 60.7650 per dollar as investors favored the greenback after latest data bolstered the U.S. economic outlook. Bonds and stocks declined.
The Bloomberg Dollar Index, which tracks the U.S. currency against 10 major trading partners, rose after data yesterday showed U.S. new-home sales and consumer confidence exceeded economists’ estimates. Federal Reserve Chairman Ben S. Bernanke said June 19 the central bank may phase out a stimulus program this year should the U.S. economy improve.
“This currency weakness was not triggered by India’s fundamentals,” Anubhuti Sahay and Samiran Chakraborty, Standard Chartered economists in Mumbai, wrote in a report today. “A weaker rupee can add to inflationary pressure, widen the fiscal deficit and slow capital inflows, without having a positive effect on the current-account deficit.”
The rupee slid 1.7 percent to 60.73 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It has fallen 7 percent this month, the world’s worst performance, and slumped 10.6 percent this quarter, the most since 1991. The plunge will inflict “significant damage” on India’s economy and the central bank’s ability to stem the drop is limited as currency reserves are enough to cover only about seven months of imports, according to Royal Bank of Scotland Plc.
The Reserve Bank of India sold dollars, two traders with knowledge of the matter said, asking not to be named as the information isn’t public. The bank sold “small amounts” to smooth volatility rather than protect a certain level, one of them said. The country’s foreign currency stockpile was $290.7 billion as of June 14, down from an all-time high of $321 billion in 2011, official data show.
The Bank of New York Mellon India ADR Index slipped 0.3 percent as of 10:47 a.m. in New York after the S&P BSE Sensex (SENSEX) fell 0.4 percent to 18,552.12 at the close in Mumbai. The 50-stock CNX Nifty Index on the National Stock Exchange of India lost 0.4 percent to 5,588.70. Its June futures settled at 5,581.10. India VIX, which gauges the cost of protection against losses in the Nifty, fell 0.3 percent.
“The rupee’s fall unnerved investors as 60 was a psychological barrier,” Gajendra Nagpal, chief executive officer at Unicon Financial Intermediaries Ltd., said by phone from New Delhi. “The currency weakness will deter foreigners and any chance of a rate cut by the RBI is out of question.”
The Sensex has dropped 4.5 percent this year, reversing gains after climbing to a two-year high on May 17, as foreign funds extended a sell-off of local shares amid the fall in the currency. The gauge trades at 12.4 times projected 12-month profits, near to the cheapest level since April, compared with the MSCI Emerging Markets Index’s 9.3 times.
One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 68 basis points, or 0.68 percentage point, today to 12.59 percent.
Bharti Airtel Ltd. (BHARTI), India’s largest mobile-phone operator, slumped 6 percent to 277.7 rupees, its steepest drop since Aug. 9. Tata Motors Ltd. (TTMT), the owner of Jaguar Land Rover, slid 3.1 percent to 272.65 rupees, its seventh day of fall. Mahindra & Mahindra Ltd. (MM), India’s largest maker of sport-utility vehicles and tractors, plunged 4.8 percent to 911.15 rupees, the most since Jan. 30, 2012. Aluminum producer Hindalco Industries Ltd. (HNDL) decreased 2.4 percent to 94.7 rupees. HDFC Bank Ltd., India’s most valuable lender, fell 1.8 percent to 622.85 rupees.
Indian bonds fell, sending yields to a two-month high, on speculation the rupee’s plunge will limit the scope for the RBI to further cut interest rates. A sustained 10 percent drop in the rupee adds 150 basis points to 200 basis points to wholesale-price inflation, Standard Chartered estimates.
The yield on 8.15 percent notes due June 2022 rose 10 basis points, or 0.10 percentage point, to 7.79 percent in Mumbai, according to the central bank’s trading system. That is the highest level for the note since April 17.
The jump in yield prompted the Fixed Income Money Market and Derivatives Association of India to ease an indicative daily band. The trading band was doubled for all maturities, said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. The limit for 10-year bonds was raised to 20 basis points over yesterday’s closing yield level, compared with 10 basis points allowed usually, he said.
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose 11 basis point to 7.54 percent, the highest level since May 26, data compiled by Bloomberg show.
Overseas funds have pulled $1.5 billion from domestic shares in June, poised to become net sellers for the first month since May 2012. They have also cut rupee debt holdings by $5.1 billion after buying in each of the previous six months. The sell-off is the reason for the rupee’s slide, the RBI said in a June 17 statement, as it kept interest rates unchanged for the first time in four meetings.
“The 60 level is a very attractive level for the currency, I don’t see much depreciation from current levels.” Jeff Chowdhry, head of emerging-market equities at U.K.-based F&C Asset Management Plc. (FCAM), which oversees about $150 billion, told Bloomberg TV India today. “The dollar strengthening has affected all emerging market currencies” and fundamentals of the Indian economy aren’t any worse than they were six months ago, he said.
Three-month onshore rupee forwards fell 1.5 percent to 61.50 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts declined 1.7 percent to 61.78. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.