Rupee at record low, stocks drop as US$10 bil exits India

NEW DELHI: India’s rupee weakened to a new low and stocks slumped anew amid a global meltdown in risk assets, with rising number of coronavirus cases locally adding to anxiety. Sovereign bonds also declined.

The rupee declined as much as 1.2% to 75.175 per dollar to go past the key 75 mark for the first time.

The S&P BSE Sensex held at a three-year low at the close after narrowing losses of as much as 7.5%, while the NSE Nifty 50 Index recovered from lows seen in the days after the government’s cash ban in 2016.

Global funds have been seeking the safety of the dollar while fleeing stocks, bonds and other currencies, emulating a pattern that was the hallmark of the 2008 global financial crisis, as countries and policymakers continue to ramp up measures to contain the virus epidemic.

Foreigners have pulled a combined US$10 billion from Indian shares and debt so far this month – the biggest withdrawal since the US taper tantrum of 2013.

“Market sentiment is fragile, risk assets are under pressure and demand for USD remains strong by foreign investors,” said Divya Devesh, head of Asean and South Asia FX research at Standard Chartered Plc in Singapore. “We expect more INR weakness in the very near-term.” The currency had hit a record low of 74.5250 on Friday.

Traders say the Reserve Bank of India has been using its record foreign reserves to stem the rupee’s decline. The authority was cited selling dollars via state-owned banks in early trade via state-run banks, traders said.

On its part, the RBI provided US$2 billion of dollar liquidity via a forex swap on Monday, and will provide a similar line on March 23.

The rupee may test 76.50 in the coming days and weeks, according to Abhishek Goenka, chief executive at India Forex Advisors. “In such a risk-averse situation, when investors are unloading equities, bonds and currency, no level has any sanctity.”

Stocks recovered from the day’s lows amid optimism Prime Minister Narendra Modi may add to measures taken to contain the virus and soothe investor sentiment in his address to the nation Thursday evening.

Vulnerable sectors

“There are sectors that are vulnerable like aviation and hospitality and whenever Mr Modi speaks there are expectations that something constructive would come out of it,” said Gaurang Shah, vice president at Geojit Financial Services Ltd. in Mumbai. “The question to ask is whether stimulus alone is the answer to this pandemic.”

Sovereign bonds also fell despite RBI announcing a plan to buy bonds via open market operations on Friday. The yield on the benchmark 10-year debt was up 11 basis points to 6.41%.

The central bank has been splashing the markets with liquidity in a bid to prevent hardening of yields and any credit freeze.

The “market meltdown is reviving the spectre of the GFC – when the notion of safe asset shrinks dramatically, and equities, gold, and treasuries can sell-off in tandem,” Edelweiss Financial Services Ltd economists including Kapil Gupta wrote in a note. “Policy response has a lot to catch up,” the note added.

India has so far reported 169 coronavirus cases and three deaths, while 276 of its citizens abroad have contracted the disease.

That’s a sharp rise from early March when India was thought to be relatively insulated, and experts have warned containment steps that proved successful elsewhere in Asia may not work locally.