Stars not favoring Indian Rupee, even RBI’s policy cannot relax the free fall

The Indian rupee is finding it difficult to stay afloat against US benchmark dollar at interbank forex market, not only this the domestic currency has continued to be among worst performer in EM markets. Even the Reserve Bank of India (RBI) second bi-monthly monetary policy has failed to control the free fall of Indian rupee against US dollar. The rupee has been hovering over 67-mark per dollar since RBI hiked policy repo rate by 25 basis points to 6.25% from previous 6%. On the day, when RBI governor Urjit Patel along with six-member Monetary Policy Committee released the outcome of India’s  policy, the Indian rupee welcomed the move with opens arms as it strengthened by 0.39% to 66.84-level against dollar, but the scenario changed immediately next day and since then rupee has been on free fall against the dollar.

On Friday, the Indian rupee finished at 67.515 down by 0.100 or 0.15% against US dollar, as per investing.com data. Also, foreign outflows and negative domestic indices added to weighed on rupee.

Last week, FPI removed Rs 1,020.30 crore cumulatively in hybrid, equity and debt market, as per NSDL data. Meanwhile, the benchmark Sensex closed at 35,443.67 down by 19.41 points or 0.05%, whereas the Nifty 50 ended muted at 10,767.65.

There are problems ahead for Indian rupee which even RBI’s policy fails to cheer the currency.

According to Kotak Institutional Securities, when US yields cool off, oil jumps. When oil cools off, Dollar takes off against EM currencies. When everything else seems risk on, reverberations of EM contagion start creating a lot of noise. Yesterday, it was the Brazilian currency, which depreciated by over 3% against the USD.

Kotak explained, Real has been on a free fall for some time now, but it is yesterday it made headlines. It was devaluation in Argentine Peso a couple of months back that has been pulling Real lower, a major trading partner. Domestic political troubles and economic woes are not helping matters for Brazil. It is a fragile financial world.

Anindya Banerjee, analysts at Kotak said, “ There is little appetite to absorb sell-off in one part of EMs, without adversely impacting Bonds, equities and FX of other EMs. Fragility in the emerging market can be attributed to broad based monetary policy discipline around the developed world, led by US. History is a witness, when DM central banks, viz., Fed goes on a campaign to tighten monetary policy, it causes financial conditions to tighten significantly in the emerging markets, due to their refinancing risk in US Dollar.”

Banerjee added, “With US economy expected to keep performing well throughout this year, supported by near USD 2 trillion of fiscal stimulus (tax cuts and spending push and more could be coming), financial conditions are expected to tighten further for EM economies, including India.”

In currency markets, the US dollar touched its highest level in May since December 2017.

“Overnight, Brent crude has bounced back to 77.50 dollars a barrel, which is another negative for the Rupee. With oil refusing to sustain at lower levels, US yields ranged between 2.80-3.00, EM risk over the horizon, a tight monetary policy back home in India threatening to push bond yields higher, with 10 year flirting with 8 handle, outlook remains negative for the Rupee,” said Banerjee.

RBI on it’s monetary policy on June 06 said, “Financial markets have been driven mainly by monetary policy expectations and geo-political developments. Equity market performance has varied across regions with modest gains in the AEs on strong Q1 earnings and abating of trade tensions, while stocks in major EMEs have faced sell offs on a rising dollar and expectations of further rate hikes by the Fed.”

RBI explained, the 10-year sovereign yield in the US crossed 3 per cent in mid-May on strong economic data as well as expectations of tighter monetary policy and fiscal expansion, but softened subsequently on safe haven demand; yields softened in other key AEs as well. In most EMEs, however, bond yields have risen on reduced foreign appetite for their debt due to growing dollar shortage in the global market and on prospects of higher interest rates in AEs.

Three are two major events over the horizon for Euro traders, Fed policy followed by ECB monetary policy.

Well how Indian rupee performs against these currencies during the event, will be keenly watched.