Indian Rupee, Bonds, Stocks Fall as RBI Caught in Vicious Circle
India’s rupee completed its third monthly loss after the central bank signaled steps taken in July to buoy the currency are temporary. Stocks and bonds fell.
The Reserve Bank of India held its benchmark rate at 7.25 percent on July 30 and said the past month’s measures, which sought to shore up the rupee by creating a cash squeeze, will be reversed once the exchange rate stabilizes. The RBI, sounding “apologetic” for its actions, is sending confusing signals to investors, according to Nomura Holdings Inc. Higher fund costs resulting from the central bank’s policies may hurt the economy and cause more currency weakness, triggering a “vicious circle,” Credit Agricole CIB said in a research note.
“The market went into yesterday’s meeting expecting the RBI to sound hawkish, and instead the tone was relatively dovish,” Nizam Idris, head of fixed income and currency strategy at Macquarie Bank Ltd. in Singapore, said in a phone interview on July 31. “It would seem odd if the RBI again reverts and imposes more rupee-support steps, so it seems to be left with no choice but to let the market decide a stable level.”
The rupee weakened 1.6 percent last month to 60.3600 per dollar, according to prices from local lenders compiled by Bloomberg. It plunged to an all-time low of 61.2125 on July 8. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, surged 129 basis points last month, or 1.29 percentage points, to 13.80 percent. That’s the highest in Asia.
The currency rose 0.2 percent yesterday, after earlier falling to within 0.1 percent of its record low, as Finance Minister Palaniappan Chidambaram said the government has decided on steps to lure investment from Indians living abroad, and issuing foreign-currency sovereign bonds remains an option. The rupee also gained on speculation the RBI sold dollars, according to two traders with knowledge of the matter, who asked not to be named as the information isn’t public.
India’s benchmark stock index fell 0.3 percent in July, its second month of losses, as the rupee’s fall spurred concern that capital outflows will accelerate. The S&P BSE Sensex fell less than 0.1 percent to 19,345.70 at the close even as a gauge of 233 medium-sized companies fell to a 18-month low.
The Bank of New York Mellon India ADR Index gained 3.6 percent in July, the first monthly advance in six months. American depositary receipts of Tata Motors Ltd., India’s biggest truckmaker and owner of Jaguar Land Rover, climbed 2.6 percent last month to $24.04. ADRs of ICICI Bank Ltd., India’s second-largest lender by assets, sank 14 percent to $32.78.
Yes Bank Ltd. (YES) slumped 7 percent after raising its leading rate, pacing a measure of 12 lenders to its lowest level in 11 months. NTPC Ltd. (NTPC), the nation’s largest power utility, dropped to a 4 1/2-year low.
Government bonds dropped in July, pushing the yield on the 7.16 percent bonds maturing May 2023 up by 75 basis points, the biggest monthly gain for benchmark 10-year rates since March 2009. The yield yesterday slid six basis points, or 0.06 percentage point, to 8.20 percent. The rate was at 8.42 percent on July 24, the highest for a benchmark 10-year note since May 2012.
“The situation in India is quickly turning into a vicious circle,” Guillaume Tresca, a strategist at Credit Agricole in Paris, wrote in a report yesterday. “The marginal costs of the recent tightening measures are significantly outweighing the benefits as rates remain elevated with liquidity conditions tight. Higher rates in turn lead to higher debt-servicing cost and worsening fundamentals, which are the root cause of rupee weakness.”
RBI Governor Duvvuri Subbarao’s decision to hold rates was predicted by all but one of 32 analysts in a Bloomberg survey. Earlier in July, he boosted two other rates, curbed funding support for banks and raised lenders’ daily reserve requirements to buoy the rupee. A reversal of those measures would enable “monetary policy to revert to supporting growth,” the RBI said in a statement on July 30.
The prospect of the rupee falling past 62 per dollar may add pressure on the central bank to raise banks’ cash reserve ratio from 4 percent, said Macquarie’s Idris. The currency will end 2013 at 62, according to Macquarie and Nomura.
Global investors have pulled $1 billion from local stocks last month and $2 billion from bonds, data from the regulator show. The RBI pared its economic-growth forecast for the year to March 2014 to 5.5 percent from 5.7 percent on July 30. The Indian economy’s resilience to shocks has been eroded and the rapid weakening of the rupee has put the country into a vicious spiral, Subbarao said on July 30.
“If the tight liquidity conditions continue for long, the impact will start to spill over from the financial markets to the real sector,” said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai.
The “turmoil” in the markets was triggered by the Federal Reserve’s signal that it may taper stimulus this year, the RBI said July 30. The Federal Reserve said yesterday that it will maintain its $85 billion in monthly bond purchases and persistently low inflation could hamper the expansion.
Three-month onshore rupee forwards fell 0.8 percent to 62.28 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 1 percent to 62.36. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
To contact the reporters on this story: Jeanette Rodrigues in Mumbai at firstname.lastname@example.org; Shikhar Balwani in Mumbai at email@example.com; Santanu Chakraborty in Mumbai at firstname.lastname@example.org