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Rupee, bonds see red on Fed

Currency hits 62, closes at 61.65; RBI?s capital control steps weigh

Rupee plummeted to a new historic low of 62/$ on Friday, on fears the Reserve Bank of India (RBI) could take more capital control measures and speculation that the US Federal Reserve could start to taper its quantitative easing programme as early as next month.

The currency recovered slightly towards the end of the session on the back of dollar sales by public sector banks at the behest of RBI, but closed at a record low of 61.65 a dollar.

?Rupee has been unanchored. We could see levels of 65/$ and I wouldn?t rule out a move towards 70/$ either,? said Bhanu Baweja, global head of emerging market cross asset strategy, UBS AG.

Brijen Puri, head of India markets at JP Morgan too said that a fall to 65/$ cannot be ruled out.

On Wednesday, RBI brought down the overseas direct investment of companies to 100% of their networth from 400% earlier under the automatic route. The central bank also curbed the amount individuals can remit abroad to $75,000 from $200,000 under the liberalised remittance scheme and barred any real estate investment.

?While today the restriction is on resident individuals and corporates, the measures from the RBI have increased fears of capital controls on foreign investments,? said Puri of JP Morgan.

Rupee has fallen over 10% since May 22 when the Federal Reserve indicated it would begin rolling back its quantitative easing programme, also called QE tapering. The QE tapering is expected to cut down global liquidity, anticipating which foreign investors have started pulling out from emerging markets, including India.

Overnight, better than expected US economic data had led to fears the tapering would begin at the US Federal Reserve?s September meet. This pushed US 10-year bond yields to near 2 year highs of 2.78% on Thursday.

In response, selling pressure was seen on domestic equity and bond markets through the session, which exxacerbated the pressure on the Rupee.

?The rupee?s fall was a combination of the impact of rise in US yields and outflows from domestic equity markets. The sentiment continues to be weak for the currency,? said Ashutosh Raina, head of forex trading at HDFC Bank.

To arrest the rupee?s continuous fall over last two months, the government and RBI have taken a series of measures to lure inflows, address speculation by tightening domestic liquidity and curbing outflows but these have largely failed to help the currency.

In addition, curbs have been placed on gold imports to bring down the current account defict to $70 billion or 3.7% of GDP compared with 4.8% of GDP in 2012-13.

Market participants, however, say measures announced so far are not enough and are unlikely to help in a big way.

?Apart from gold, the major causes of the widening account have been increasing coal and fertilizer imports and falling iron ore exports. Gold, which is the only one that has been addressed, is the symptom and not the cause,? said Puri. There may not be big benefits of the capital controls as remittances are a small amount, he added.

While rupee has been battered since the QE tapering concerns began, most of its global peers barring the Brazilian real have faired better. Since the Fed?s indication of QE tapering, the Brazilian real has shed 14.5%, the Russian ruble has weakened 5% while the South African rand fell 4.3%. The fixed Chinese renminbi has strengthened by 0.3%.

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First published on: 17-08-2013 at 03:06 IST
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