The rupee on Tuesday inched closer to the 75 level against the US dollar and plunged another 33 paise to close at a record low of 74.39 hit by a surge in crude oil prices and strength in the American dollar.
The rupee, which closed lower against the dollar for the sixth session in a row, also spooked the stock markets with the BSE Sensex erasing all early gains during the day to end 175 points lower in choppy trade at 34,299.47.
The Indian currency has depreciated close to 14 per cent from the beginning of the financial year (April 2018) when the exchange rate was 65.18 against the dollar. The weakness in the rupee is often seen as a plus point for exporters but adversely affects importers, mainly oil marketing companies.
Corporates which have large borrowings from the foreign markets in the form of External Commercial Borrowings (ECBs) not only have to pay higher rupee cost as interest but also have to manage their cash flows at the time of principal repayment.
VK Sharma, Head, Private Client Group & Capital Market Strategy, HDFC Securities, said, “interest rates are headed higher in the US. Ten-year bond yields in the US surged to 3.26 per cent. Fears that global investors will withdraw their funds from global markets and park in US treasuries are affecting the global markets. Crude oil prices also rose one per cent to $ 84.7. Rising crude oil prices and higher US bonds yields have resulted in a weak Indian currency.”
Advising caution, stock market veterans said a weak rupee and capital outflows are pulling down the stock markets. “We maintain our cautious view on the Indian markets in the near term as we believe weakness could continue on the domestic bourses, unless the rupee and crude oil prices show some signs of stability,” said Jayant Manglik, president, Religare Broking.
The weakening rupee is expected to result in an additional burden of Rs 22,500 crore on the corporate sector which they have borrowed from overseas markets. “The principal repayment of external commercial borrowings during the last four years (FY15-FY18) has been range bound around $25 billion. If one assumes that the same amount is going to be repaid by the corporates during the current financial year (FY19), the effect of the depreciating Indian rupee on repayment of the principal amount is to the tune of Rs 22,500 crore,” Care Ratings said in a report on Tuesday.
Capital outflows are also pulling down the rupee. Foreign investors pulled out over Rs 17,181 crore from the Indian capital markets in the last five trading sessions on unabated fall in the rupee and rise in crude oil prices, according to figures available with NSDL.
The latest withdrawal comes following a net outflow of over Rs 21,035 crore from the capital markets (both equity and debt) in the month of September. With this, foreign investors had pulled out a whopping Rs 92,000 crore from Indian markets since April this year. FPIs have been withdrawing from emerging markets, including India, following the rate hikes by US Federal Reserve.
“Volatility continued in the market in spite of which short-term investors are accumulating select beaten down stocks with an eye on upcoming quarter earnings,” said Vinod Nair, Head of Research, Geojit Financial Services. However, negative sentiments from global market on concerns over a slowing world economy led by lingering trade war between the US and China dragged the market, he said.