India's rupee plunged the most since 1996, to a record low, on concern the nation's current-account deficit will worsen as oil prices climb amid political tensions in the Middle East. Bonds and stocks fell.
The U.S. said yesterday President Barack Obama will hold Syria accountable for using chemical weapons against its people, fanning concern that unrest in the region will disrupt fuel supplies. Brent crude rose 4 percent in August, boosting costs for Asia's No. 3 economy that buys almost 80 percent of its oil abroad. India is also the world's top buyer of gold, the price of which gained 15 percent this quarter. Costlier imports are adding pressure on India's balance of payments at a time when the prospect of a cut in U.S. stimulus is fueling fund outflows.
"The rupee is likely to continue to be under pressure, given rising gold and oil prices," Dariusz Kowalczyk, a senior economist at Credit Agricole CIB in Hong Kong, said in an e-mail interview. "Any major dip in the dollar-rupee exchange rate should be seen as a buying opportunity for the pair given lack of sufficient measures that would turn around India's weak fundamentals."
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The rupee slumped 2.9 percent, to an unprecedented 66.19 per dollar, in Mumbai. It was the biggest drop since Feb. 5, 1996, according to prices from local banks compiled by Bloomberg. The currency has lost 10.3 percent this quarter and almost 17 percent this year, Asia's worst performance.
The yield on the benchmark 7.16 percent government bonds due May 2023 jumped 52 basis points, or 0.52 percentage point, to 8.86 percent, the biggest increase since July 16, according to the central bank's trading system. The S&P BSE Sensex of local shares slid 3.2 percent, the most since Aug. 16, to 17,968.08, with Housing Development Finance Corp. and HDFC Bank Ltd. leading declines. MCX gold futures climbed to a record.
"The sharp fall in the rupee is what's worrying investors the most," Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments Hong Kong Ltd., which has $40 billion in equities, said on Bloomberg TV today. "Most foreign investors are overweight on India, and their risk managements are actively questioning the huge overweight position."
Dollar-based investors have lost 23 percent from Sensex shares this year, data compiled by Bloomberg show. The gauge has slid 7.3 percent in local currency terms this year.
Global funds have cut holdings of Indian debt by $10.3 billion since May 22, when the Federal Reserve flagged a potential reduction of bond purchases. Local gold prices have surged 26 percent since the end of June as the rupee's plunge threatens to stoke inflation, boosting the lure of the metal as a store of value.
Forwards, Volatility
"The market seemed to come to the conclusion that there was no immediate danger of meaningful official intervention, and that policy uncertainty remains the dominant feature of the local landscape," Triple T Consulting's Sean Keane writes in note distributed to Credit Suisse AG's clients.
India's budget and current-account deficits are responsible for the rupee's fall, Finance Minister Palaniappan Chidambaram said in New Delhi today. The government is taking steps to contain the shortfall in the broadest measure of trade to within $70 billion in the year through March 2014, he added, compared with an unprecedented $87.8 billion the previous period.
One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, rose 117 basis points to 17.33 percent.
Three-month onshore rupee forwards fell 2.2 percent to 67.46 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 2.4 percent to 67.90. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.
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