The steadily falling rupee is set to hurt corporate borrowing as foreign investors begin to seek higher return on Indian bonds. Bankers believe the sharp depreciation of the local currency in recent days exerts more pressure on the economy's fundamentals increasing the risk perception on rupee investments.
Fears of a trade war has led to global weakness in emerging market currencies. The rupee breached the 72-level against the greenback for the first time last week, before recovering to close at 71.99 against the dollar. After the fallback, there was panic among importers in India, who rushed in fearing further depreciation. A massive intervention by the RBI, believed to have sold close to $1 billion in the interbank market, helped the rupee close below the 72-level.
Dealers said recent developments are negative for large corporate and banks who were planning to raise funds in the international markets. Foreign investors who are present in the local markets too have been selling bonds. Finance company Nomura said there have been outflows in Indian bonds recently. Both long-term investors and other investors have reduced their holdings with corporate debt too seeing cumulative outflows in the last five sessions.
Craig Chan of Nomura Securities wrote in a research report, “The political calendar is expected to heat up with state elections in November/December- including in Chattisgarh, Madhya Pradesh, and Rajasthan. An August ABP-CVoter opinion poll suggested that the BJP could lose its majority in all three states, which would bode poorly for the general election next year, and weigh on the Indian rupee sentiment.”
So far the central bank has only used intervention as a tool to defend the rupee. The other instruments used in the past include a separate window to enable oil companies to buy dollars without adding to the demand in the market. The central bank could also hike short-term interest rates to make it more expensive for speculators to bet against the rupee.
