Rupee, stocks join global glum, extend losses

The rupee, which has now lost 8% against the dollar in 2022, slid to as low as 81.24 Friday before reported central bank intervention hauled the unit to just above 81 at the close of trading. The currency’s pronounced fall accompanied accelerated selling in stocks, particularly of banks and other financiers, causing both the Nifty and the Sensex to decline 1.7% each.

Foreign Portfolio Investors (FPI) dumped shares worth ₹2,899.68 crore, while domestic institutions were net buyers to the tune of ₹299.10 crore.

“Overseas outflows may push the rupee further down, with 81 being the new psychological level in the currency market,” said Bhaskar Panda, executive vice president,

. “Overseas investors will likely bet on spiking yields in the developed economies. With a sliding rupee, global investors are also likely to be concerned about India’s widening current account deficit.”

The Dollar Index, which measures the world’s reserve currency against other major monetary units, surged to a two-decade high of 111.96.

The Reserve Bank of India (RBI) is estimated to have sold up to $2 billion Friday to stem the rupee’s precipitate decline, market sources told ET. At least three public sector banks were seen selling dollars through a combination of spot, forwards and futures-market interventions, they said. Central bank officials could not be immediately reached for comments.

“The worries in the market are a mix of both external and internal risks,” said Nilesh Shah, managing director, Kotak Mutual Fund. “Externally, there is the Russia-Ukraine war threatening to blow up even further, while the Fed is determined to slow things down. Internally, we have the rupee depreciating which may prompt foreign investors to sell India and move money to safer assets like the dollar.”

The sentiment in markets such as New York, London and Singapore have turned sour with various central banks boosting rates significantly to restrain inflation. The markets have been most impacted by the US Federal Reserve’s actions on September 21 when the central bank raised a key policy rate by 75 basis points to a range of 3% to 3.25% and projected to raise it to 4.60% by 2023.

On Friday, the Sensex tumbled 1,020 points to close at 58,098.92 while the Nifty plummeted 302.45 points to end at 17,327.35. Elsewhere in Asia, China declined 0.7%, Hong Kong fell 1.2%, South Korea dropped 1.8% and Taiwan declined 1.2%. The pan-Europe index Stoxx 600 fell 2.37% while the Dow Jones Industrial Average was 2.1% down at the time of going to press. Investors now believe that high borrowing costs will likely push Western economies into a deeper recession.

Yields in the developed markets are rising much faster than in India, potentially triggering further sales of local assets by overseas funds. This month, the UK Treasury benchmark yielded 95 basis points higher at 3.75%. US treasuries climbed more than 50 basis points to 3.76%. By contrast, India’s sovereign debt barometer has climbed only 20 basis points to 7.39%. “Overseas inflows will tend to flow back to the developed economies due to narrowing yield differentials with emerging markets such as India,” said Kunal Sodhani, vice president, Shinhan Bank. “With the strengthening dollar index, the rupee is likely to slide further. Central bank intervention may partly shift to the future and forward markets depending on the rupee liquidity.”

Earlier in the week, banking system liquidity slipped to a deficit for the first time in more than three years. However, it bounced back to surplus mode Thursday after the RBI conducted a variable repo auction to infuse Rs 50,000 crore of cash into the system. Barring the Russian rouble and South Korean won, all other emerging market currencies lost value to the US dollar.

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