How soaring global yields weigh on rupee

While the rupee hit the new lifetime low at 81.24 Friday, the trend is in the direction as almost all emerging market currencies are falling due to US dollar strength on flight of capital back to the US.

The Reserve Bank of India is estimated to have sold up to $2 billion Friday to stem the rupee’s rout, market sources told ET. At three public sector banks were seen selling dollars through a combination of spot, forwards and futures market, they said.

RBI could not be contacted immediately for comments.

“Overseas investors will likely bet on spiking yields in developed economies amid a sign of safety,” said Bhaskar Panda, executive vice president at

. “With a sliding rupee global investors are also likely to be worried over India’s widening current account deficit.”

“Overseas outflows may push the rupee further down with 81 being the new psychological level in the currency market,” he said.

This month the UK Treasury benchmark yielded 95 basis points higher to 3.75%. The spike was only followed by a surge of 57 basis in US Treasury gauge, now at 3.76%.

Compare this with a 20 basis points rise in India’s sovereign debt barometer, now at 7.39%.

“Overseas inflows will tend to flow back to developed economies with narrowing yield differentials with emerging markets like India,” said Kunal Sodhani, vice president at Shinhan Bank. With strengthening dollar index, the rupee is likely to slide further.”

The rupee plunged past the new psychological mark at 81 hitting a new lifetime low at 81.24 Friday, show Bloomberg data compiled by ETIG.

Sustained dollar selling by the Reserve Bank of India helped recoup losses of the local unit, which closed at 80.99 to the dollar, down 0.15 percent.

“Central bank intervention may partly shift to the future and forward markets depending on the rupee liquidity,” he said.

Earlier in the week, the banking system liquidity slipped to deficit mode for the first time in over three years. However, it bounced back to surplus mode Thursday after the RBI conducted a variable repo auction to infuse Rs 50,000 crore cash into the system.

India, being a net importer will have to fork out higher cost of overseas payables if the rupee’s value against the greenback.

Globally dollar dominance is going up as the cost of living is heating up. The Dollar Index, which measures the unit against other major currencies, spurt to about two-decade high at 111.96.

Barring Russian Ruble and South Korean Won all other emerging market currencies lost value to the US dollar that has paced up especially after the US Fed spelt out a hawkish policy tone signalling higher than anticipated rate hikes to douse hot consumer prices.

The rupee ranked eighth best performing currency among other emerging peers while the local unit lost more than 8% this calendar.

Even the Japanese central bank reportedly intervened in the foreign exchange market, arresting a drop in the yen’s value on Thursday to buy yen for the first time since 1998.