Rupee feels the pinch as US yields, oil move higher

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Pressure on the rupee might increase after the benchmark US treasury yield pierced the 3 per cent mark on Tuesday and current account deficit could significantly reduce demand for the Indian currency.

Added to the macro-economic headwinds is the rush of importers to cover their dollar positions as the rupee seems to have decisively shifted to a weaker trajectory, currency traders said.

On Wednesday, the rupee ended at 66.90 per dollar — the lowest level since February 23, 2017. It fell 51 paise, or 0.77 per cent, the biggest single day fall since January 16, 2018.

Bankers said the Indian currency could slide further. “Things have changed in the last few days. The 10-year US treasury has now decisively moved above 3 per cent, reflecting the fundamental strength of the US economy. Foreign investors are selling assets in India and oil has also touched $75. The momentum is definitely against the rupee,” said Harihar Krishnamoorthy, head of treasury at FirstRand Bank.

Brent crude at $75 a barrel is at the highest level since November, 2014, due to production cuts by the Organization of the Petroleum Exporting Countries (Opec) and heightened tensions between the US and Iran. Oil prices have increased close to 12 per cent this year, raising concerns of a wider current account deficit.

Earlier this month, a note by Kotak Economic Research said that India’s current account deficit could be the highest in six years, assuming crude to be anywhere between $65 and $75 per barrel. Foreign investors have already adjusted their positions on the country, noting the rupee’s fall. So far in April, foreign funds have sold debt and equity assets worth Rs 12,244 crore.

Traders said the currency will most likely weaken toward 68 per dollar in the next few days and will finally settle at a higher trading range of 65.50 to 66.50 compared to 64.50 to 65.50 earlier.

Banks such as Standard Chartered, ANZ and TD Securities have also cut their targets for the currency, Bloomberg reported. Standard Chartered expects the rupee to end the year at 65.50 versus 61.50 previously, while Kotak Mahindra said the currency could fall past its 2016 record low of 68.89 per dollar if global and local risks play out.

“Rates in the US are already high and they are factoring in another three hikes this year. The only thing that can help the rupee is a pullback in oil prices, which will reduce the deficit and bring back interest from FIIs. For now though, the currency is on a weak wicket,” Krishnamoorthy said.

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