The rupee on Tuesday plunged below the 68-mark to 68.07 against the dollar for the first time since January 2017, as uncertainty over government formation in Karnataka hit the forex market sentiment. The money market also witnessed turbulence with the 10-year benchmark bond yield ending at a three-year high of 7.905 per cent, a level last seen on May 18, 2015, from its previous close of 7.825 per cent.
When it became clear that the BJP was unlikely to get absolute majority, the 30-share BSE Sensex slipped 437 points from day’s high to end down 12.77 points at 35,543.94 while the 50-share NSE Nifty managed to hold the 10,800-mark, down 4.70 points at 10,801.90.
According to dealers, the rupee and bond prices fell after the latest round of counting in Karnataka election results showed the BJP will fall short of gaining a clear majority in Karnataka assembly election. Congress said it will extend support to the JD(S) in forming the next government in Karnataka.
The Indian currency, one of the worst performers in the current fiscal, closed at 68.07 against the dollar, a level last seen on January 24, 2017, down 0.86 per cent from its previous close of 67.52. Outflows from the equity and debt markets also contributed to the fall in the rupee. Foreign investors have pulled out around Rs 9000 crore from the equity market and Rs 21,000 crore from the debt market in April and May.
Anand Shah, deputy CEO & head of investments, BNP Paribas Mutual Fund, said: “Domestic stocks began the trading day on a buoyant note as initial trends showed the BJP taking a huge lead in Karnataka. The general opinion is that a BJP victory in Karnataka will revive hopes of Narendra Modi forming the government again in 2019, which is important for the follow up of important economic reforms taken up in the recent past.” However, markets gave up their gains to finally close the day near the flat line.
“Increasing inflation print has caused concern in some corners of the investor community. The all-India general CPI inflation increased to 4.58 per cent in April 2018 (new base 2012=100), compared with 4.28 per cent in March 2018, snapping the consistent moderation in the last three months. While the IT, metals and private banking indices registered some gains, auto, media and PSU banking indices traded with losses.
Siddharth Khemka, Head of Retail Research, Motilal Oswal, “the market witnessed increased volatility as the election outcome indicated that BJP was just short of a clear majority. Investors generally like a stable government and a decisive mandate is something markets always take positively. Going by last few weeks’ trends, markets were factoring in a decisive win for BJP. While they may be short of the majority, BJP has emerged as the single largest party and that trend is something that could help them in the upcoming general elections.”
“The Reserve Bank of India is unlikely to be comfortable with firm core inflation amidst higher volatility in the bond and exchange rate markets. These factors validate our expectations for the RBI policy committee to veer towards a hawkish stance in June (small probability of a pre-emptive hike)…” said Radhika Rao economist at DBS Bank.