Indian rupee drops to record low; stocks fall

An employee counts Indian rupee notes inside a private money exchange in New Delhi. Rupee fell to a record yesterday after a US jobs report showing companies hired more workers than economists forecast added to the case for the Federal Reserve to reduce monetary stimulus.

Bloomberg/Mumbai

India’s rupee fell to a record after a US jobs report showing companies hired more workers than economists forecast added to the case for the Federal Reserve to reduce monetary stimulus.

US payrolls rose by 195,000 workers for a second month in June, the Labour Department reported July 5 in Washington, exceeding the 165,000 median estimate in a Bloomberg survey.

The Dollar Index, which tracks the greenback against six major trading partners, rose to the highest level since July 2010. Global funds have pulled $7.6bn from Indian bonds since holdings touched an all-time high on May 21. The currency pared losses on speculation the central bank intervened.

The US jobs data “could lead to outflows from all emerging markets,” said Vikas Babu, a trader at state-owned Andhra Bank in Mumbai.

The rupee declined 0.6% to 60.6150 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It dropped as low as 61.2125, passing the previous record of 60.7650 on June 26. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 75 basis points, or 0.75 percentage point, to 13.56%, the highest closing level since June last year.

Fed Chairman Ben S Bernanke signaled May 22 that the central bank’s asset-buying programme could be tapered should the job market continue to improve. The unemployment rate held at 7.6% in June, near a four-year low.

The central bank probably sold dollars today to slow the rupee’s drop, two traders said, asking not to be identified as the information isn’t public.

Any dollar sales by the Reserve Bank of India will be aimed at reducing market volatility, rather than supporting the exchange rate, as the rupee’s slide is in line with losses in other currencies, according to Barclays. The dollar climbed against eight of 11 Asian currencies tracked by Bloomberg.

“The RBI is definitely concerned about rupee weakness,” said Nick Verdi, a strategist at Barclays in Singapore. “It will look to combat this mostly through verbal intervention” and “moves to discourage speculation,” he said.

The yield premium on 10-year Indian sovereign bonds over similar-maturity US Treasuries has slid 134 basis points from this year’s high of 622 on April 5.

The RBI, concerned about the fastest growth in currency derivatives trading in more than three years, is asking overseas funds to prove they aren’t speculating on the rupee.

Turnover in futures and options involving the currency climbed 47% to a daily average of Rs387.7bn ($6.4bn) in June on the National Stock Exchange of India, the biggest jump since January 2010.

The RBI on June 26 asked overseas funds for proof that individual accounts were seeking to limit currency risk on securities by using derivatives. The central bank has also enquired about foreign lenders’ open positions involving the rupee. Global investors can only use rupee futures and options to protect their holdings of Indian shares and debt.

Three-month onshore rupee forwards fell 0.6% to 61.80 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts rose 0.4% to 61.94.

Meanwhile, Indian stocks declined for the first time in three days as stronger-than-forecast US jobs data fuelled concern the Federal Reserve will reduce its stimulus programme.

The S&P BSE Sensex tumbled 0.9% to 19,324.77 at the close in Mumbai. The measure’s 30-day volatility held near a one-year high. Reliance Industries, owner of the world’s largest refining complex, lost 1.5%. Housing Development Finance Corp sank the most in five weeks.

The Sensex has dropped 3.7% since May 22 when Bernanke said the central bank will slow stimulus if the US economy improves. That spurred investors to sell emerging markets’ assets, including Indian equities.

A weaker currency raises India’s cost of imported oil, likely paring the central bank’s scope to pare interest rates at its meeting on July 30. Crude in New York traded near a 14-month high.

“The environment for emerging markets, including India, is difficult at the moment given the rising US yields and strengthening dollar,” Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance Co in Mumbai, said in an interview yesterday. “Chances of a rate cut later this month are zero due to the continuous fall in the rupee. Rising oil prices have only added to India’s woes.”

Global equities have lost more than $3.7tn in value and US Treasury yields have climbed to an almost two-year high since May 22. Foreign funds withdrew a net $1.76bn from Indian stocks in June, the most since August 2011, according to data compiled by Bloomberg. They sold $3mn of shares on July 5, the data show.

Reliance Industries lost 1.5% to Rs866.95. The stock had increased 11% over the past two weeks. Oil & Natural Gas Corp tumbled 3.9% to Rs303.85, its lowest close since June 24.

Housing Development plunged 3.1% to Rs824.05, the most since May 31. ICICI Bank, the second-biggest lender, retreated 2.2% to Rs1,027.95, while larger rival State Bank of India lost 1.1% to Rs1,873.2.

Mahindra & Mahindra, India’s largest producer of tractors, lost 2.5% to Rs947.7. Tata Motors, the nation’s biggest truckmaker and owner of Jaguar Land Rover, tumbled 2.8% to Rs287.8, the most since June 26.

JLR factories in UK may have to stop production within weeks after delivery workers from DHL who work at three of the carmaker’s main plants voted to strike over pay. The company asked the workers to “return to the negotiating table,” Ken McConomy, spokesman for Jaguar Land Rover, said on Sunday.

Reliance Communications, the mobile phone operator controlled by billionaire Anil Ambani, jumped 7% to Rs145.2, the highest in more than two years, after the company said it plans to spin off its real estate business. The stock, which is not part of the Sensex, has doubled this year.

The Reserve Bank of India left its key rate unchanged on June 17, ending three straight cuts. While official data June 14 showed wholesale-price inflation slowed to a 43-month low in May, a separate gauge of consumer prices rose 9.31%, the fastest after Argentina in the Group of 20 nations. India buys about 80% of its crude from overseas.

Deutsche Bank cut its year-end Sensex target to 21,000 from 22,500, citing prospects for tapering of Fed’s bond-buying programme, a slowdown in China and a weak rupee. A reversal in inflation, elevated interest rates and the current-account gap has been delayed by “the generic risk-off sentiment enveloping emerging markets,” analysts Abhay Laijawala and Abhishek Saraf wrote in a report yesterday.

Crude gained, with West Texas Intermediate trading near the highest price in 14 months, as protests in Egypt fanned concern that Middle East oil supply may be disrupted. Brent crude, the benchmark for two-thirds of the world’s oil, rose 0.2% to $107.96 a barrel.

The Dollar Index, which tracks the greenback against six major trading partners, rose to the highest level since July 2010. The rupee fell 0.6% to 60.6150 at the close.

The Sensex trades at 12.9 times projected 12-month earnings. While that’s down from a 3 1/2-month high of 13.7 reached May 17, it’s still at a 36% premium to the MSCI Emerging Markets Index’s multiple of 9.5.

The CNX Nifty Index on the National Stock Exchange of India fell 1% to 5,811.55.