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Saturday, July 21, 2018

Unwinding of carry trade, FPI outflows hit Rupee

The rupee has fallen 3.8 per cent in the current financial year with the dollar exchange rate dropping from 65 to 68.07 from March 28, 2018 to May 15, 2018.

Written by George Mathew | Mumbai | Published: May 17, 2018 3:08:44 am
Unwinding of carry trade, FPI outflows hit Re The rupee has fallen 3.8 per cent in the current financial year. (Source- File)

Though the rupee on Wednesday recovered to 67.80 against the dollar from the 16-month low of 68.07 mainly due to intervention by the Reserve Bank of India (RBI), the foreign exchange market is betting on the currency’s slow and steady march towards the hitherto untested 70 mark as emerging markets are witnessing unwinding of currency carry trade and outflow of foreign capital.

The rupee has fallen 3.8 per cent in the current financial year with the dollar exchange rate dropping from 65 to 68.07 from March 28, 2018 to May 15, 2018. Putting pressure on the rupee, Indian markets witnessed foreign portfolio outflows to the tune of $ 2,765 million and $1,795 million in April and May 2018 compared with FPI inflows of $ 3,513 million in April 2017. A similar trend was witnessed in the month of February 2018 when foreign investors took out a total of $ 1820 million. “The outflows in FPI are majorly on account of outflows in the debt segment amid increased expectations of US rate hikes,” said a Care Ratings report.

The dollar has appreciated against major currencies in the wake of a rise in US treasury yields which, in turn, has led to FPI outflows from India. The rupee fall of 3.8 per cent is much lower when compared to other emerging market currencies.

Abhishek Goenka, Founder & CEO, IFA Global, said the unwinding of carry trade across emerging markets, rise in the US yields to 3.06 per cent amid higher debt supply and higher crude oil prices are haunting global markets. In a currency carry trade, an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.

The benchmark 10 year government bond yields increased by 50 basis points from 7.4 per cent to 7.9 per cent in the last two months amid rising inflation and fears of a rate hike by the RBI in the next monetary policy.

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