Currency among worst performers in emerging markets ; widening current account deficit weighs, more rate hikes may be on the cards

The rupee breached 72.5 a dollar on Monday and touched all-time low of 72.67 intraday as the current account deficit widened to five- year high in the first quarter of the current financial year, to $15.8 billion or 2.4%, of the GDP.

Following media reports quoting unnamed Finance Ministry officials that steps would be taken to arrest the fall in the currency, including deposit schemes for non-resident Indians along with central bank intervention, the rupee strengthened to 72.18 but again lost steam during the end of the trading session.

“First time there was some verbal intervention by government that measures shall be taken to rein in rupee weakness,” said Sajal Gupta, head, forex and rates, Edelweiss Securities.

‘May test 73.50’

“And some dollars sold by RBI helped rupee recover from 72.67 to 72.18 and it closed at 72.44. But still, rupee looks slippery again unless some policy measures or strong intervention [is taken]. It’s now slated to head toward 73.50 levels,” Mr. Gupta said.

Currency dealers said the central bank is not intervening aggressively as before. In June, the RBI had sold more than $6 billion in the spot market. The data for July and August are yet to be released by the central bank.

The rupee lost as much as 1.3% intraday before cutting some losses and ended at 72.45 a dollar — an all-time closing low, down 1% over it’s previous close of 71.73 a dollar. Rupee was the worst performer among emerging market currencies in Asia, depreciating about 13% this financial year amid limited intervention by the central bank. In September, rupee has depreciated 1.7% so far against the dollar.

According to dealers, investors are concerned over economies that are expected to experience worsening balance of payments position.

“On the external stability front, we expect the current account deficit to widen to 2.5% of GDP in FY2019 and 2.7% in FY2020, reflecting a combination of adverse terms of trade and a pickup in capex,” Morgan Stanley wrote in a note to it’s clients.

Morgan Stanley expects inflation to accelerate prompting the central bank to hike interest rates by 50 basis points (bps), including 25 bps in the next policy review due in early October.

“We expect another 25bps rate hike in October, as we think the Reserve Bank of India will front-load its hiking cycle to keep inflation expectations anchored. We highlight the risk of another rate hike of 25bp in the remaining part of the fiscal year, contingent on evolving external conditions,” it said.

Bond yields rise

Bond yields spiked over fears of further rate hike as the yield on 10-year benchmark government bonds rose 13 bps to close the day at 8.16%. RBI had hiked interest rates by 50 bps since June this year over inflation concerns.

Moody’s Investors Service warned that a sustained weakening of the rupee would be credit-negative for its rated Indian companies.