Fears that the US Federal Reserve would start to taper its quantitative easing (QE) programme as early as next month sent the rupee reeling to a historic intra-day low of 62 against the dollar on Friday even as equity markets went into free fall and bond yields spiked to a 21-month high. The dollar on Friday strengthened against several currencies including the Thai baht, Singapore dollar, Indonesia rupiah and most of all against the rupee.
Adding to the nervousness were apprehensions the Reserve Bank of India (RBI) might resort to more controls to contain dollar outflows on the back of the measures initiated on Wednesday. While the Indian currency closed the day at $61.65, the Sensex crashed 769.41 points to end the session at 18,598.18 while the yield on the benchmark bond surged 50 basis points to 8.89%. While the government forked out 53 basis points more to borrow 10-year money at the bond auction on Friday than it did last week, yields on corporate paper jumped 20 basis point on Friday over Wednesday’s closing.
US 10-year treasury yields soared to near two- year highs of 2.78% on Thursday and were trading at similar levels on Friday at 7.40 IST.
Better-than-expected US economic data on Thursday — a drop in US jobless claims to its lowest level since October 2007 — has led to anxiety that the tapering of QE3 would begin at the Fed’s September meet. The tapering is expected to suck out liquidity from the markets, especially emerging markets which have seen large foreign flows over the past year.
Since May 22, when the Fed indicated it would begin rolling back QE, foreign institutional investors have pulled out $5.75 billion from domestic bonds and $ 5.4 billion from the equity markets, as a consequence of which the rupee has depreciated by 11.2%.
"The rupee has been unanchored. We could see levels of 65 and I wouldn't rule out a move towards 70 either," Bhanu Baweja, global head, emerging market strategy, UBS, observed. Brijen Puri, head, India markets, JPMorgan, concurred, saying a fall to 65 cannot be ruled out. “The RBI’s measures for individuals and corporates have increased fears of capital controls on foreign investment,” Puri said.
Samir Arora of Helios Capital , however, felt that while there could be many legitimate reasons for the weakness, attributing it to a move towards capital controls was plain ridiculous. “The forex markets like nothing other