The rupee fell 0.98 per cent to end at 72.45 against the dollar. The currency declined to 72.67 in early trade but managed to recoup some of the losses as state-owned lenders resorted to selling dollars. Hopes that the Reserve Bank of India (RBI) and the government might take steps to stem the fall also provided some support.
The benchmark 10-year government bond yield spiked 13 basis points to 8.16 per cent — a level last seen in November 2014 — on concerns that the RBI might have to raise rates aggressively to tackle the currency weakness.
Foreign portfolio investors (FPIs) on Monday sold shares worth Rs 8.4 billion, extending their one-month selling to over Rs 50 billion. Global investor sentiment towards emerging markets
such as India has been weak following a rout in the currency market.
“Given India runs a CAD, it remains vulnerable to bouts of global risk aversion. Higher oil prices and portfolio outflows are its key external vulnerabilities. Aside from these, the key risks stem from the government turning populist ahead of the 2019 general elections and a sharper-than-expected domestic growth slowdown, triggering equity outflows,” said Nomura in a note.
FPI selling from the debt market has been even more pronounced. FPIs have pulled out $700 million from debt markets this month and $6.33 billion so far in 2018. Radhika Rao, economist, DBS Bank, said global volatility was hurting India’s balance of payments, forecasting the CAD to widen further.
“For the year, the CAD is likely to widen further, inferring from a jump in the goods trade deficit in the third quarter, resumption of FPI outflows after a brief pause in July-August, and a moderation in service trade surpluses,” she said in a note.
Experts said cracks have started to build in the equity markets, which have so far been resilient to the currency weakness.
“The persistent weakness in the Indian rupee is now starting to show its impact on all asset classes, including equities,” said Jagannadham Thunuguntla, head of research, Centrum Wealth, adding, “The sentiment risk is now the major challenge for stock markets.”
Thunuguntla said investors need to be careful and limit their exposure to export-oriented sectors and zero-debt companies as bond yields have risen to multi-year highs.
Dhananjay Sinha, strategist at Emkay Global Financial Services, said the CAD could widen to 2.5 per cent due to rising commodity prices and possible FPI outflows. He said the rupee could weaken to as low as 75 against the dollar and the 10-year benchmark bond yield could reach 8.4 per cent.