Mumbai: The Indian rupee on Monday weakened against the US dollar as investors were disappointed with the latest measures taken by the government to halt the continued fall in currency. The rupee ended at 72.51 a dollar, down 0.90% from its previous close of 71.86. The currency opened at 72.49 a dollar and touched a low of 72.69. The 10-year bond yield closed at 8.098%, from its previous close of 8.127%. Bond yields and prices move in opposite directions.
Government on Friday unveiled series of steps to support the currency including relaxing overseas borrowing restrictions on manufacturers and easing the cap that limits foreign ownership of individual company bonds. Finance minister also expressed confidence that the government will meet its fiscal deficit target of 3.3% of gross domestic product.
“We view the government’s guarded response as appropriate because India’s macro fundamentals are in a much better shape today than in 2013 – higher growth, stable inflation and fiscal commitment − and do not necessitate a knee-jerk reaction. However, given the build-up of expectations into the weekend meeting (with some talk of non-resident Indian bonds and rate hikes not being ruled out), the policy response will likely disappoint market expectations”, said Nomura Research in a note to its investors.
“In our view, the announcements may fall short of bringing in the USD8bn-10bn estimated by the government because most capital inflows (especially by FPIs) are driven by global push factors rather than domestic pull factors. Measures on curbing imports could work, albeit with a lag. As such, continued global trade tensions may end up offsetting the domestic announcements in the near term”, Nomura research added.
The finance minister has said five decisions have been taken to address the issue of the current account deficit, which touched 2.4% of gross domestic product in the June quarter. Mandatory hedging conditions for infrastructure loans through the external commercial borrowing (ECB) route will be reviewed and a 20% exposure limit on investments by foreign portfolio investors in debt to a single corporate group will be removed.
Government will permit the manufacturing sector to access ECBs up to $50 million with residual maturity of one year instead of three years. Masala bonds will be exempted from withholding tax this financial year and Indian banks will be allowed to become market makers in masala bonds including by underwriting.
Investors will now focus on the Reserve Bank of India’s bi monthly policy on 5 October for fresh cues.
Traders are cautious ahead of the implementation of US tariffs on an additional $200 billion Chinese imports. On Thursday, the Wall Street Journal reported that talks between China and the US were at risk amid fresh threats from the Trump administration of tariffs on $200 billion of Chinese imports.
“We believe that the INR will remain under pressure as the DM monetary policies unwind (along with the effects of trade wars, higher crude prices, etc.) and their effects on EMs are visible over the next few years”, said Kotak Institutional Equities in a note to its investors.
Kotak report says that India needs to improve its savings profile in order to manage its external sector risks. If macroeconomic risks are to be mitigated, the aggregate demand needs to slow down. A relook at the retail credit disbursement pace, fiscal expenditure and pace of consumption is essential.
“As the global economy undergoes a prolonged period of adjustment from the winding up of easy monetary policy in DMs, phases of pains in the EMs will continue. It will be imperative that India continues to work on its twin deficit challenges, keep inflation under check, and balance its consumption-savings behavior” Kotak report added.
So far this year, the rupee has weakened 11.83%, while foreign investors have sold $879.20 million and $6.31 billion in equity and debt markets, respectively.
Benchmark Sensex Index fell 1.33% or 505.13 points to 37,585.51. Since January, it has gained 10.4%.