currency worries after the rupee crossed 72.5/$ in intraday trades

It was a day of sharp correction in the Nifty as it cracked sharply by 151 points to 11,438 on rupee worries. Sensex was down by over 400 points. The Nifty fell sharply on Monday on the back of currency worries after the rupee crossed 72.5/$ in intraday trades. The sharp rise in the bond yields to 8.16% also spooked the markets. There was selling across the board with the exception of IT stocks. Consumer facing stocks like automobiles and FMCG took the biggest hit during the day. The EM panic appears to be taking its toll as the currency panic appeared to spread across EM economies.

Japanese financial giant, Nomura, has identified 7 emerging markets that have a distinct currency crisis risk. The good news is that it does not include India. Nomura has identified EMs like Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine as the most vulnerable to a currency crisis. Nomura sees the probability of a currency crisis in India very low due to moderating inflation. According to Nomura, due to India’s CAD levels, it may be vulnerable to bouts of risk aversion but not so much about a currency crisis. That may mean outflows but not much of a macro risk.

The real action on Monday was on the INR and the bond yields. Rupee tumbled to 72.445/$ and 10 year bond yields closed sharply higher at 8.16%. The rupee was weakening on dollar demand and yields were shooting on expectations that the weakness in the rupee may induce another rate hike. The rupee is at an all time low and it did manage to touch a low of 72.67 during the day. The respite for the rupee came only after the government threw hints that they may quickly opt for a special NRI deposit scheme. The government has already asked the RBI to intervene quickly to stem the fall in the rupee.

Chandra continues with his restructuring exercise as Tata Global Beverages restructures its overseas operations with a view to cutting costs. Tata Global Beverages announced the merger of its businesses in Canada, Australia, Americas, Europe, Middle East and Africa. The company has also sold its plantations in Sri Lanka and wound up its joint venture in China. Synergies from the merger are likely to lead to substantial cost savings. Tata Global may eventually become the core holding of the Tata group for all its food related consumer businesses.

Government asks RBI to ramp up efforts to support the Rupee. With the rupee losing nearly 13.5% in value since the beginning of the year, the INR is turning out to be among the worst performing currencies. The government is worried that it could pose a problem for dollar loans and imports. The RBI does have options like rate hike and NRI deposits as part of its strategy and it remains to be seen which strategy it opts for. The forex chest of the RBI has shrunk from $428 billion to below $400 billion and currently it covers less than 9 months of imports. That means the RB may not have much of leeway on the dollar selling front. The RBI may be now constrained to push through its NRI dollar deposit scheme rapidly as a strong inflow of dollars would be the best against the falling rupee.

In a fairly quick and surprising move, Iran issued tender to buy 30,000 tonnes of rice from India. This rice will be purchased in two tranches of 15,000 tonnes each and will be routed through Iran’s state grain buyer, GTC. The tender assumes significance in the light of the fact that India was looking to stop its import of oil from Iran post the US sanctions taking effect in November this year. It would be interesting to see how this impacts India’s decision on sourcing crude from Iran. Whether India sides with its own economics or with US dictates may be an interest play in trade and diplomacy for India.

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