Updated: Wed, Aug 28 2013. 05 49 PM IST
Mumbai: The rupee plunged to a new low on August 28, towards the 69 mark, on concerns of a possible flight of capital from Asia’s third largest economy and escalation in tensions in global markets.
Heavy dollar demand in the foreign exchange market, mostly panic-driven, negated the impact of Reserve Bank of India’s (RBI’s) interventions to support the rupee, dealers said. The currency ended the day at 68.83 to the dollar, down 3.83% from its previous close, after touching a new lifetime low of 68.85. This is the biggest daily decline in 20 years.
Earlier in the day, the rupee partially recovered tracking the recovery in equity markets and on speculation that the central bank had intervened to support the currency. Stop-loss transactions were triggered at near 68.75 per dollar, Bloomberg reported, citing two traders who asked not to be named as the information isn’t public. But the currency couldn’t sustain the gains.
“The recovery in the equity markets has helped (in rupee’s recovery). There were also signs of RBI intervening to support,” a dealer with a foreign bank in Mumbai said. He didn’t want to be named. RBI typically intervenes in the currency market through state-run banks in the event of high volatility.
Since January, the rupee has weakened 20.09% and lost the most among Asian currencies. The turmoil in the markets continued on concerns that the US may take military action against the Syrian government and on pessimism in the domestic market that the Congress party-led United Progressive Alliance (UPA) government would not be able to control India’s worsening fiscal condition.
Repeated assurances from the government that it is in control of the fiscal situation haven’t helped, dealers said.
BSE’s benchmark index Sensex later recovered to end the day 0.16% higher at 17,996.15 points, recovering 519 points, or 2.89%, from its intra-day low.
There were rumours of Life Insurance Corp. of India buying shares in the market, dealers said.
The broader 50-share Nifty index of the National Stock Exchange ended at 5,285 points, down 0.05%. Bond yields jumped, despite the central bank’s plan to infuse another Rs.8,000 crore in the banking system by buying back bonds.
The yield on India’s 10-year benchmark bond ended at 8.966%, from its previous close of 8.735% and after touching a high of 9.029%.
“There are fears about the external situation. FIIs (foreign institutional investors) are taking their money back home. Primarily, this is a panic situation that is impacting the sentiments in the market,” said N.S. Venkatesh, treasurer at IDBI Bank Ltd.
Financial markets are also worried about a likely pressure on fiscal deficit due to the implementation of the proposed food security law, which promises to sell subsidized foodgrain to 67% of India’s population. It is likely to cost the treasury Rs.1.3 trillion a year.
Under the proposed law, each beneficiary will be entitled to 5kg of rice, wheat and coarse grains at Rs.3,Rs.2, and Rs.1 per kg, respectively.
The cabinet committee on investment on Monday cleared 36 projects entailing investment of Rs.1.83 trillion, but the announcement had no positive impact on the markets.
Finance minister P. Chidambaram on Tuesday batted for more reforms, less restrictions and a more open economy to overcome the current economic crisis.
Charting a 10-point agenda to revive the levers of the economy in Parliament on Tuesday, Chidambaram said the immediate priority of the government is to contain the fiscal deficit and the current account deficit in the fiscal year to March. “We will contain fiscal deficit at 4.8% of gross domestic product and current account deficit at $70 billion this year,” he said.
Bloomberg contributed to this story.
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