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The rupee plunged to a record low while bond yields jumped on concerns over higher inflation and widening current account deficit after crude oil prices surged to $130/bbl amid intensifying Russia-Ukraine war.
The rupee closed the day at 76.97/$, the lowest ever after plunging 1.05 per cent against the dollar. Intraday, the rupee hit 76.98/$, prompting the state-run banks to sell dollars on behalf of the Reserve Bank of India (RBI). This fall was the fifth occasion when the rupee fell over 1 per cent in the day.
The previous all-time low for the rupee was recorded on April 16, 2020, when it closed 76.87 against the dollar.
“Oil prices shock, rise in US dollar index and relentless foreign portfolio investment (FPI) outflow in the equity market caused the rupee to fall towards an all-time low,” said Anindya Banerjee, DVP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities.
Market participants expect the Indian currency could head towards 79/$ if oil prices stay elevated.
“However, aggressive intervention from the RBI has kept volatility low. We expect Rupee to remain under pressure till oil prices fall. However, volatility will be very high. A range of 76.50 and 78.50 can be seen over the near term,” Banerjee said.
The central bank has been intervening quite aggressively in the currency market after geopolitical tensions increased in the past 10-12 trading sessions. The aggressive intervention has slowed down the pace of the fall in the rupee. Nevertheless, the Indian unit is the worst performing in Asia in 2022, depreciating 3.42 per cent.
“Rupee continued to remain under pressure and fell to fresh all-time lows following rising uncertainty between Russia and Ukraine and a rally in global crude oil prices. Momentum has been towards rupee depreciation for the past few sessions as market participants remain on the edge following geopolitical tensions,” said Gaurang Somaiya, forex & bullion analyst, Motilal Oswal Financial Services, adding they expect the rupee to trade with a positive bias and quote in the range of 76.70 and 77.50.
India, which imports over 80 per cent of its crude oil requirements, will be impacted badly due to the rise in oil prices. Retail inflation — the main yardstick of the central bank to decide interest rate — has topped the upper tolerance band of 6 per cent in February. In addition, high oil prices will widen the current account gap and impact economic growth.
Rating agency ICRA said it expects the Indian current account deficit to widen to 3.2 per cent of gross domestic product (GDP) in FY23 if the crude oil price averages $130/bbl, crossing 3 per cent for the first time in a decade.
“We expect the US dollar-INR cross rate to trade in a range of 76.0-79.0/$ until the conflict subsides. Moreover, the 10-year G-sec yield is likely to range between 7.0-7.4 per cent in H1 FY2023, with the looming increase in supply. We now see large downside risks to our FY23 GDP growth forecast of 8 per cent, with higher commodity prices set to decimate margins,” the rating agency said.
India’s current account deficit was at $9.6 billion in the July-September of 2020-21, which formed 1.3 per cent of the gross domestic product. The yield on the 10-year government bond hardened 7 basis points to 6.89 per cent after the surge in crude oil prices. The yield of the 10-year government paper has hardened 43 bps in 2020.
With the government planning to borrow a massive Rs 11.6 trillion (net) in the next fiscal year, there would be upward pressure on bond yields, market participants said.
“Higher commodity prices are fuelling inflation fear and that may lead RBI to increase interest rates faster than anticipated,” said Prashanth Tapse, vice president (Research), Mehta Equities.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, suggested the central bank would look for some unconventional strategy to manage next year’s borrowing programme. “The RBI can issue papers by matching the profile of redemption of government paper. Ideally, papers up to seven years in the short-term segment, 10-15 years in the mid-segment and beyond 15 years in the long-term segment could be the ideal mix of meeting the borrowing appetite of market players,” Ghosh said in a report.
adding that the government could announce a quarterly borrowing calendar, instead of a half-yearly calendar that will provide the flexibility to manage borrowing in line with evolving revenues and expenditures.
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