Markets

What triggered panic in rupee and bond traders?

After a whipsawed morning trade, the Indian rupee joined stocks and bonds in a choreographed south-bound journey late afternoon Tuesday, plunging to a 16-month low against the US dollar on concerns that a split verdict in Karnataka could dim the BJPs prospects of re-conquering its beach-head in the peninsula.

Surging oil prices and higher US yields, too, contributed in exacerbating the currencys fall to 68.11 against the dollar: The rupee retreated 59 paise, or 0.9%. This is the weakest close for the rupee since January 24, 2017. Bond yields, too, raced to a three-year high of 7.91%, with the yield on ten-year sovereign debt surging 29 basis points in the past seven sessions.

“A combination of factors, including rising oil prices, higher US treasuries, global dollar strength and not-so-positive Karnataka outcome has triggered a sharp fall in the rupees value,” said Ashish Vaidya, head of trading at DBS Bank India. “The weakness is likely to remain as long as negative global macro factors are in play,” he said.

Toward the latter half of the trading day in Mumbai, poll data suggested that the BJP would fall short of securing an absolute majority on its own in the state, the only southern province it has previously administered.

Crude oil prices, meanwhile, have crossed $78 per barrel compared with $71.82 a month earlier. Rising crude prices widen Indias fiscal deficit as the country meets about four-fifths of its need through overseas shipments.

“The central banks suspected intervention could not temper the sharp fall, especially toward the end of the trading day,” said Anindya Banerjee, currency analyst at Kotak Securities. “Some domestic institutions suffered losses as they went short on dollars. Select corporate treasuries are now going long on the dollar, exerting more pressure on the rupee.”

A large private sector bank is said to have lost money as it short-sold dollars, dealers said. Two large Indian conglomerates are now seen shoring up dollar reserves as they have substantial overseas liabilities.

“Indian companies with uncovered short-term imports rushed to buy dollars amid nervousness in the market,” said Param Sharma, chief executive at NSP Forex, a Mumbai-based firm.

The benchmark bond yield hit a three-year high as overseas investors exited debt investments to bet on US Treasuries that crossed the crucial 3% mark.

Foreign portfolio investors have sold about Rs 14,800 crore worth of bonds and equities this month, with the rising US yields burnishing the allure of safe-haven assets.

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