Rupee slips on rising oil, trade deficit concerns

 Rupee slips on rising oil, trade deficit concerns

The rupee was one the worst performing emerging market currencies in the world on Tuesday as rising oil prices and worsening trade deficit, which hit a three-and-a-half year high in December, spooked investors. The local unit lost nearly 1% to the US dollar and yields on old benchmark bonds surged to about 22-month high to 7.56% after RBI deputy governor Viral Acharya warned banks to manage interest rate risk on their own.

In terms of spot returns, the rupee ranked 23, yielding -0.65% this calendar year, just ahead of Turkish Lira among emerging market, Bloomberg data show."Poor deficit number, coupled with rising oilBSE 1.46 % prices, is leading to a short-term panic in the markets," said Ashish Vaidya, head of markets for India at Singapore's DBS Bank. "If this trend sustains for a few days, we need to be on a high alert as markets are expected to turn volatile."

The rupee closed at 64.04 to a dollar, down from 63.49 on Monday. During the day's trading it fell to a low of 64.11, a level not seen since December 28."More permanent flows across current account deficit, foreign direct investment and foreign portfolio inflows in equity have turned negative this fiscal year, with rise in commodity prices," said Ananth Narayan, a professor of finance at SP Jain Institute of Management and Research in Mumbai. "

Given this background, the rupee will likely underperform other currencies as the macro environment turns, and some of these carry flows stop or even reverse."

Impact of RBI Statement

Trade deficit, or the excess of imports over exports, hit three-year high of $14.88 billion in December while crude oil prices touched a three-year peak of Rs 70 a barrel.Bonds also suffered a rout after the Reserve Bank of India deputy governor Viral Acharya signalled that the regulator wouldn't bail out banks from market losses.

The new benchmark bond yield spurted about 20 basis points to 7.38% since its introduction earlier on January 5."Even the RBI statement on interest rate risk management weighed on the market heavily," said Anindya Banerjee, deputy vice-president at Kotak Securities. "Some have rushed to sell securities as they expected a selling spree by foreign portfolio investors."

Acharya on Monday said banks have to take care of the risks and not depend on regulatory easing of measures."Interest rate risk of banks cannot be managed over and over again by their regulator," Acharya told the audience at the annual Fixed Income and Money Market Dealers Association meet.

"Market liberalisation does not just involve the regulator easing business processes, introducing new products and creating new markets; it also requires participants to take initiative to reskill themselves for constantly evolving market conditions and products.'' Overseas flow has also slowed amid hardening of rates in developed world.

"A combination of rising twin deficits and possible inflationary impact of rising oil and commodity prices may prompt the MPC to increase rates in coming months," said Narayan. MPC refers to the RBI's rate-setting monetary policy committee which is slated to meet on February 7.

 

The Economics Standard, New Delhi, 17th January 2018