Markets

How PNB scam moved the currency market?

MUMBAI: Early last week, Punjab National Bank (PNB) told Indian stock exchanges it has been the victim of an elaborate fraud that could cost the stretched banking system Rs 11,400 crore in the very least.

The startling announcement of the country’s biggest banking fraud seems to have capped a tortuous journey for Indian public lenders since they began disclosing a couple of seasons ago their bad debts that have now swelled to Rs 10 lakh crore. While revival in the broader economy has so far limited the impact of asset quality slippage on Mumbai’s currency and debt markets, the glaring oversight gaps in India’s banking system now threaten to send the rupee lower.

In the past three trading days since the PNB heist came to light, the local unit appears to be heading in that direction – southward. It lost about 150 basis points against the dollar before the regulator stepped in to arrest the slide, dealers said.

Even so, the rupee fell to a three-month low to close at 64.79 per dollar, nearly 1% down from 64.21 on Friday. On Tuesday, the currency dipped to as low as 64.86. Currency and bond markets were shut on Monday.

“A combination of negative factors may have dented overseas investor sentiment about India,” said Ashish Vaidya, head of markets for India at Singapore's DBS Bank. “If the rupee fall continues for the next two-three days, we could be at the starting point of a bigger depreciation in the rupee. We do not see any consolidation in the currency market for now.”

Overseas investors were seen short-selling the rupee against the dollar. However, some exporters were reportedly going long on the local unit, finding it an opportune time to cover their overseas receivables.

Investors are now bracing for an extended fall, with foreign portfolio investors selling their holdings. Between February 15 and 20, overseas investors have net exited Rs 2,150 crore worth of debt securities collectively in a three-day selling spree, show data from National Securities Depository.

“A negative sentiment is weighing on global investors," said Anindya Banerjee, currency analyst at Kotak Securities. "They are apparently worried about the government's policy reforms after the scam broke out.”

The rupee could trade in the range of 64.50 and 65.20 to a dollar in the next few trading days, dealers said.

“With the US Treasury surging, the rupee may continue to remain under pressure in the short term unless we get more clarity," said Banerjee.

The benchmark US Treasury yield shot up to 2.93%, its highest in four years, with the dollar gaining strength against major currencies. Money managers find this level attractive enough to bet on the world’s safest securities.

Back home, the domestic benchmark yield too shot up to nearly two-year high at 7.67%, mirroring the US rise.

“A scam like this could put the government on the back-foot ahead of the general election. The government could well resort to popular measures, deviating from its reforms agenda,” said a foreign bank executive, who did not want to be named.

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