Mumbai: The Indian rupee breached 66 per dollar and stock market indices plunged on Tuesday on concerns about a likely increase in the government’s subsidy burden following the passage of the food security Bill in the Lok Sabha.
The rupee, the worst performer among Asian currencies this year, plunged to a new historic low of 66.19 per dollar. Bond yields rose, too, reflecting the negative sentiments in currency and equity markets.
The rupee is under severe pressure, mainly on concerns about the impact on government’s worsening finances while implementing the much-hyped food security Bill, which promises heavily subsidized grains to the poor. “The trinity of the fiscal deficit, slowing growth, and an unstable currency is hitting us badly. In addition to these, the government has passed the Food Security Bill which may put fear in the mind of rating agencies,” said G. Chokkalingam, managing director and chief investment officer of Centrum Wealth Management in Mumbai.
“There are concerns about the impact on government’s finances when they implement the food security Bill. This is negative for the markets,” said a treasury dealer in Mumbai, asking not to be identified.
Earlier on Tuesday, finance minister P. Chidambaram denied that the Bill will affect the fiscal deficit and said it would continue to be the 4.8% of gross domestic product (GDP) he projected in his budget speech in February. Referring to this proportion as the “red line”, he said: “The red line will not be breached. We think we have provided enough money” till the end of the year to implement the scheme.
Besides domestic factors, the rupee also tracked the weakness seen in most of the currency and stock markets in Asia, dealers said. Most Asian currencies were trading down, with the Indonesian rupiah plunging more than 4%, Malyasian ringgit by 0.61% and Philippines peso dropping 0.77% on Tuesday. Most of the stock markets in Asia, too, were trading down with Philippines stocks falling by over 3% and Jakarta’s composite index losing 3.71%.
The rupee has lost 16.91% against the dollar in 2013. In the last two weeks alone, the currency has lost 7.54% against the dollar.
The BSE benchmark Sensex lost 590.05 points in intra-day trade. The index fell 3.18% to 17,968.08 points, while the 50-share Nifty index of the National Stock Exchange (NSE) dropped 3.45%, or 189.05 points, to 5,287.45 points.
The BSE Bankex, the index of major bank stocks, was the worst hit among the sectoral indices, losing about 5.34% intra-day.
In a Monday meeting, the Cabinet Committee on Investments cleared 36 projects entailing investments of Rs.1.83 trillion.
On Monday, the Lok Sabha passed the food security Bill, which now requires the Rajya Sabha’s approval to become law. Under the proposed law, each beneficiary will be entitled to 5kg of rice, wheat and coarse grains at the subsidized price of Rs.3, Rs.2, and Rs.1 per kg, respectively. Analysts expects the scheme to increase India’s fiscal deficit.
Bond yields inched up, despite RBI announcing the buyback of long-dated bonds on Monday evening to infuse Rs.8,000 crore of liquidity into the banking system. This is the second such buyback, known as open market operation (OMO). Last week, RBI had infused over Rs.6,000 crore into the banking system through an OMO, giving some relief to cash-strapped markets and helping helping 10-year yield cool off from a record high of 9.47%.
The yield on India’s 10-year benchmark bond stood at 8.735% on Tuesday, up from its Monday’s close of 8.332%. Bond yields and prices moves in opposite directions.
“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 email 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.”
Indeed, the depreciation seems likely to continue. Three-month onshore rupee forwards fell 2.79% to 67.74 a dollar.
RBI has been struggling to arrest the currency slide through a barrage of measures, but nothing has worked.
In June, RBI banned foreign institutional investors from accessing currency derivatives market on behalf of their clients, unless “a clear mandate from the sub-account holder” is produced, and restricted banks’ ability to take positions in the currency derivatives segment. It also asked banks not to do any proprietary trading in derivatives unless done to hedge on behalf of clients.
In July, RBI began taking steps to drain excess liquidity in the banking system and curb forex outflows. It capped the amount banks can borrow from its liquidity window and raised the daily balance requirement for banks on maintaining the cash reserve ratio, or the portion of deposits the banks need to park with the central bank.
