Indian rupee and U.S. dollar banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

PNB Fraud Adds To Rupee Weakness On Tuesday

The Indian currency was the worst performer among Asian currencies on Tuesday as global and local factors knocked the rupee lower. A fraud detected at India’s second largest state-owned bank involving an importer-credit facility also soured sentiment, currency traders told BloombergQuint.

The rupee closed at 64.79 against the U.S. dollar on Tuesday, compared to Friday’s close of 64.21. The currency markets were closed for a local holiday on Monday. The Indian rupee’s 0.9 percent fall was steeper than the 0.5 percent drop seen in comparable currencies like the Indonesian rupiah and the Korean won.

A rise in global bond yields led to weakness in Asian currencies. The U.S. 10-year bond was trading close to 2.92 percent in Asian trade. This filtered through into the domestic market, where the 10-year bond yield rose to 7.67 percent. Macroeconomic factors such as the wider than expected trade deficit in January also weighed on the rupee.

In addition, the market took note of the fraud detected at Punjab National Bank. The scam originated with fraudulent Letters of Undertaking being issued via the bank, raising concerns about the impact this would have on the ‘Buyer’s Credit’ market. If some of this credit does not get rolled over, there would be greater demand for spot dollars from importers, said K Harihar, treasurer at First Rand Bank.

Two things have gone against the rupee. One is the lingering impact of the trade deficit numbers....There is also some speculation that the fraud at PNB may lead to some of the Buyer’s Credit facilities not getting rolled over and hence would need to be paid out. If they need to be paid out, then there would be some additional demand for dollars in the spot market.
K Harihar, Treasurer, First Rand Bank

The weakness in the Indian rupee is being driven by global factors like rising U.S. bond yields, said Samir Lodha, managing director at QuantArt Market Solutions, a risk management firm. The issues that have emerged at PNB and unhedged exposures of importers are also impacting sentiment, Lodha said.

Bankers, however, feel that fears around tighter scrutiny of Buyer’s Credit are not warranted. The instrument has existed for a long time, said a senior banker speaking on condition of anonymity. He added that while there will be temporary nervousness about roll-overs, the market will stabilise once it is clear that this is a standalone issue of fraud, said this banker.

PNB Fraud Adds To Rupee Weakness On Tuesday