In the past six sessions, the Sensex has shed 878 points, or 2.26 per cent. During the same period, the rupee
has declined 2.3 per cent, while the yield on the 10-government bond security has hardened by 13 basis points. Brent crude prices, which, though, fell 1 per cent on Wednesday, are up nearly 4 per cent in the past few sessions.
The rupee, which has fallen about 11 per cent against the dollar this year, is the worst-performing currency in Asia.
The fall is largely because of a widening current account deficit (CAD), estimated to have crossed 2.5 per cent of gross domestic product (GDP) in the June quarter mainly on account of high oil prices. In the March quarter, the CAD was 1.9 per cent.
The RBI, in its annual report released last week, hoped that the CAD would be financed through portfolio flows. However, the losses in the stock market suggest that foreign investors are in a sell-off mode as of now.
Foreign institutional investors (FIIs) sold shares worth Rs 3.8 billion on Wednesday, while the buying by domestic investors was relatively muted at Rs 1.77 billion. The portfolio flows were marginally positive in August, after registering an outflow of nearly $3 billion in the April-June quarter.
“Global and macro concerns are worth monitoring, particularly the depreciating currency and the potential for a rise in crude oil prices. Emerging market outflows, Fed balance sheet contraction, and rate hikes remain headwinds,” said Sunil Sharma, chief investment officer, Sanctum Wealth Management. It is difficult for the currency to recover unless the central bank supplies the dollar, which it is not willing to do now when other emerging market currencies are also witnessing a sell-off.
“The global macro environment continues to remain challenging amid continuing trade war concerns, protectionist rhetoric from the US, elevated crude prices, declining economic growth outlook, and pressure on emerging market currencies,” said Ravi Muthukrishnan, head of institutional equity research, Elara Securities.
At the start of the so-called currency war, triggered by tariff wars between the US and China, the RBI had done enough intervention to keep the rupee below the 70-mark. In May, the RBI sold $11.5 billion, but in June, it slowed its pace to about $7 billion. The data for July and August is yet to be released, but it may show that the intervention was even less in these months. The rupee crossed into 70 territories in August. Overall, the reserves have come off from its peak of $425 billion to just about $400 billion now. There is ample legroom for the central bank if it wants to intervene with another $20-30 billion, noted Nomura.
“We think drawing down FX reserves is an effective strategy, provided pressures on the BOP are only short term in nature – but if they persist and the central bank continues to use its FX reserves, then non-linear effects can set in – falling reserves set into motion a vicious cycle of denting investor confidence and triggering capital outflows, in turn leading to a more-than-proportional currency depreciation, and so on,” Nomura wrote in its report.
Instead of intervening and lose import cover, the central bank may shift its focus to other measures such as rate hikes and non-monetary ones such as dollar swaps, or other administrative or capital account ones, Nomura said. According to currency dealers, there will be no panic till the rupee hits 72-72.50 a dollar mark but beyond this, the markets may get nervous.
Dhananjay Sinha, chief economist of Emkay Global Financial Services, said the rupee might tumble as much as 74-75 a dollar, but not many in the market expected so.
The nominal value of the rupee in July should have been around 73.90 to show its fair value against its 36 trading partners, according to the RBI data. The data is released with a two-month lag. The Nifty 50 index fell 0.4 per cent to end at 11,477 on Wednesday. The small- and mid-cap indices fell in line with the benchmarks. Of the 2,931 traded on the BSE, 981 gained, while 1,784 ended with losses. The market breadth was better compared to the previous day, when three stocks had declined for every one advancing.
Among Sensex components, Hindustan Unilever declined the most at 2.5 per cent, extending three-day fall to nearly 10 per cent. Shares of Reliance Industries declined 1.3 per cent.