Indian rupee down to record low

Currency hit by resurgence in crude prices, emerging-market selloff

MUMBAI: The Indian rupee slumped to an all-time low as a resurgence in crude prices and the emerging-market selloff took a toll on the currency of the world’s third-biggest oil consumer.

The Indian currency slid as much as 0.7% to 69.0925 per US dollar yesterday, past its previous record of 68.8650 reached in November 2016. The weakness spilled onto bonds, where the benchmark 10-year yield climbed five basis points to 7.92%.

Brent crude’s sustained gains since the middle of 2017 has led to a widening of the nation’s current-account and fiscal deficits at a time when global funds have become selective about their emerging-market investments.

India relies on imports to meet about twothirds of its fuel needs, and the International Energy Agency expects the country to remain the fastest-growing oil consumer through 2040.

“Given India’s current-account deficit, there is a need to fund it, but we are on track for a fifth consecutive month of bond outflows and the equity market has also been experiencing outflows,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd in Singapore.

Without a turnaround, the rupee may weaken past 70 per US dollar, he said.

Overseas investors have reduced holdings of rupee-denominated government and corporate bonds by US$6.1bil, and pulled US$785mil from equities since the beginning of 2018.

The withdrawals have made the rupee the worst-performing currency in Asia, spurring analysts to put out bearish forecasts.

Barclays Plc now predicts the currency at 72 by year-end, while DBS Bank Ltd sees 71 to a US dollar by June 2019. The rupee fell 0.4% to 68.9225 at 1:24pm in Mumbai yesterday.

India’s assets are caught in a vicious downward spiral, where capital outflows are hurting the currency, further deterring investments.

Concerns about the government’s debt sales and the impact of rising crude prices on inflation have led to a bond selloff at time when investors are also pulling out of emerging markets because of higher Treasury yields.

Every US$10 rise in the oil price worsens India’s current-account balance by 0.4% of gross domestic product, and pushes up inflation by 30-40 basis points, according to Nomura Holdings Inc.

“Our view on broad EM (emerging market) is still one of caution, something we have been advocating for some time,” said Dushyant Padmanabhan, a currency strategist at Nomura in Singapore.

“Indian rupee in particular has also been hit by the rising oil price. Uncertainty on all these fronts could persist for some time.”

Oil has gained this week as the US puts pressure on its allies to halt purchases of Iranian supplies. West Texas Intermediate crude was little changed at US$72.73 a barrel in New York after rallying 3.2% on Wednesday.

India’s foreign-currency reserves have fallen in eight of the nine weeks to June 15, suggesting the central bank has been intervening to stem the pace of the currency’s decline.

State-owned banks are probably selling US dollars and buying rupees on behalf of the central bank, two traders from local lenders said yesterday, citing price action.

A central bank spokesperson wasn’t immediately available for comment on the rupee’s move.

The Reserve Bank of India raised its interest rates earlier this month, joining other emerging economies like Indonesia and Philippines, which tightened policies to defend their currencies. — Bloomberg