The Indian rupee fell sharply on Wednesday as a stronger dollar and outflows from local debt and equity markets weighed on the currency. The rupee closed at 66.90 against the dollar, down 0.8 percent from its previous close.
The currency has fallen the most in Asia over the last five years and is trading a its weakest since February 2017.
One key reason for this has been the pick-up in foreign outflows.
Data from the National Securities Depository Ltd shows that foreigners have sold more than Rs 11,000 crore in debt and equity as of April 23. This is most since December 2016. Sales have been heavier in the debt markets where foreigners have sold Rs 7891 crore, shows the data. Foreign investors have been net sellers in Indian debt for two consecutive months.
In the equity markets, selling has returned after a gap of a month, with investors offloading a net amount of about Rs 4500 crore.
Foreign investor sales in the debt market have picked up due to volatility in bond yields. Indian bonds have been whipsawed due to concerns around excess supply of government paper and the Indian central bank’s emerging view on inflation.
In addition, higher yields in lower risk markets like the U.S. have reduced the attractiveness of Indian debt. Overnight, the U.S. 10-year yield hit 3 percent for the first time in four years.
In the equity markets, foreign flows have tracked global market sentiment and India is not alone in seeing foreign selling. Concerns around local earnings growth and valuations have also ebbed and flowed, leading to volatility in flows.
Now, with the Rupee weakening, foreign investors find themselves in a chicken-and-egg scenario. A weaker rupee eats into the dollar returns for foreign investors, prompting them to sell. This, in turn, only adds to the pressure on the currency.
Money moving out of India can be partly attributed to the currency depreciation as the Indian rupee has underperformed other Asian currencies, said R Sivakumar, head of fixed income at Axis Mutual Fund. “Not only fixed income but equity investors also look at currency as one of the factors and that has resulted in a net outflow this month,” Sivakumar said.
An increase in the risk-free return for foreigners makes the U.S. more attractive as compared to India, said Mayuresh Joshi, Fund Manager (PMS), Angel Broking. Moreover, the rupee has depreciated over 2.5-percent this month, which would also push flows back towards the U.S., he added.