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

Rupee Hits A Record Low Of 72.74/$

The rupee touched a new low of 72.74 against the dollar as rising crude oil prices and a wider current account deficit continue to weigh on the local currency. Tracking weakness in the currency, bond yields rose to their highest in four years.

The Indian currency opened 0.2 percent higher at 72.30 a dollar, after weakening nearly 1 percent yesterday. But it failed to sustain strength and fell 28 paise over its previous closing of 72.45.

The rupee closed at its lifetime low of 72.69 per dollar.

Rupee Hits A Record Low Of 72.74/$

Bond prices also fell amid worries over higher current account deficit. As a result, the 10-year yield stood at 8.182 percent compared with yesterday’s close of 8.158 percent. Bond prices and yields are inversely related.

India’s current account deficit widened to 2.4 percent of the gross domestic product in April-June from 1.9 percent in the previous quarter, according to the RBI data released on Friday. That was mainly due to a higher trade deficit because of rising fuel prices.

Rupee Hits A Record Low Of 72.74/$

The dollar inched higher against a basket of currencies following robust U.S. August jobs data and amid fears of a potentially major escalation in the China-U.S. trade conflict.

The rupee is expected to end the year at 70 a dollar, according to the median estimate of analysts in a Bloomberg survey. Traders remain cautious ahead of the release of key consumer price inflation data tomorrow. The Indian currency, which has fallen 12 percent so far this year, is the worst performer in Asia.

“We have seen the RBI intervening successfully between 69-70 levels after July’s trade deficit came in at $18 billion,” Prasanna Balachander, group executive, head-global markets & proprietary trading group at ICICI Bank Ltd., said. “They have in fact used up $15 billion while intervening in spot and forward currency markets. However, post that RBI intervening slowed down.”

RBI can afford to be aggressive in the spot markets by selling dollar, given $400 billion of forex reserves, he said.

The Indian government is also considering tapping its citizens overseas, Bloomberg had reported citing a government official. A similar deposit scheme for non-resident Indians had helped draw inflows in 2013 when the rupee plunged after the taper tantrum.

Apart from such a scheme, the RBI can bring out a separate dollar window for oil companies “so that regular market forces don’t get impacted due to oil dollar demand”, said Balachander.

Soumyajit Niyogi of India Ratings said, “The perception of risk in the market has increased and markets are now expecting some extraordinary measures like in 2013, including the possibility of a hike in short- term interest rates...While fundamentals are stronger than 2013, that is a necessary but not sufficient condition for markets to remain orderly.”

Balachander expects a 25-basis-point rate hike each in October, December and June.