Indian five hundred rupee banknotes are arranged for a photograph in Mumbai. (Photographer: Dhiraj Singh/Bloomberg

Rupee Nears 72/$ As Global, Domestic Risks Build

The Indian rupee fell to near the 72 mark against the U.S. dollar as a selloff in emerging market currencies and limited intervention from the RBI dragged the unit down further. The falling rupee, in turn, pushed bond yields up with investors fearing the fallout of weaker currency on inflation in the economy.

The rupee closed at 71.76/$ after trade on Wednesday - down 0.3 percent compared to the previous close.

The rupee closed at a record low of 71.76/$.
The rupee closed at a record low of 71.76/$.

A “deteriorating emerging market risk backdrop” and pressure on current account deficit currencies has led to the rupee hitting record lows, said Nomura Global Markets in a research note on Wednesday. The brokerage sees risk of further depreciation for the Indian rupee due to a mix of domestic and international factors.

Local factors for depreciation include limited intervention by the Reserve Bank of India and limited concerns, in our view, over forex depreciation (watch this space), a lack of urgency to hike rates, rising political risks, and a large trade deficit with a higher oil price and portfolio outflows.
Nomura Global Markets

The rupee has now fallen 11 percent so far this year and continues to be the worst performer in Asia.

The currency has rarely seen an over 10 percent depreciation in such a short span. Other periods when the rupee has weakened this sharply include the time of the global financial crisis and the taper tantrum. To be sure, conditions in the market appear relatively more orderly now than they did in 2013 and in 2008.

Rupee Nears 72/$ As Global, Domestic Risks Build

While some still believe that the Indian currency was overvalued and was due for a correction, the pace of depreciation has led to fears of a rate hike.

On Wednesday, the fall in the rupee led to incremental selling in the bond markets and pushed up the benchmark 10-year yield to 8.10 percent intraday. It closed at 8.05 percent. Bond prices and yield are inversely correlated.

According to an estimate provided by the RBI in its April Monetary Policy Report, a 5 percent depreciation of the Indian rupee could lead to a 20-basis-point increase in inflation. This could prompt the Monetary Policy Committee to raise rates a third time this year.

If pressure on emerging markets—and therefore on the rupee and forex reserves—sustains through September, “the calculus” of the October MPC meeting is likely to change, Sajjid Chinoy, chief India economist at JPMorgan, wrote in a report on Monday.

The MPC will need to be forward-looking and assess the impact of the weakening currency and oil prices (with crude now above $77) on future inflation. More fundamentally, the value of monetary policy being both preemptive and orthodox—and the deleterious consequences of not being so – has been on display across emerging markets in recent months.
Sajjid Chinoy, Chief India Economist, JPMorgan
Rupee Nears 72/$ As Global, Domestic Risks Build