* Rupee falls to record low of 63.30 to the dollar
* India bond yields at highest since before Lehman crisis
* Outflows from India equity, debt over $11 bln since late
* Expectations of more central bank control steps intensify
By Subhadip Sircar and Swati Bhat
MUMBAI, Aug 19 The rupee hit a record low on
Monday as India's defence of the currency failed to stop its
decline but exacted a rising toll, with bond yields surging to
five-year highs and investors demanding higher returns in an
auction of cash bills.
The partially convertible rupee tumbled as far as
63.30 to the dollar despite measures in recent weeks by the
central bank and government to defend it. It ended at 63.13/14,
down 2.3 percent, its biggest single-day fall since Sept. 22,
Efforts to prop up the currency, which has tumbled nearly 13
percent against the dollar this year, have thus far proved
ineffective, making it the worst performer in emerging Asia and
threatening to drive the region's third-largest economy towards
a full-blown crisis.
In a further threat to the already-slowing economy, the
central bank's effort to shore up the currency by draining
liquidity from financial markets is pushing up market interest
Axis Bank on Monday became the latest lender to
raise its minimum lending rate by 25 basis points, to 10.25
percent, pushing up the cost of home and auto loans.
"Our primary concern is that the policy authorities still
don't 'get it' - thinking this is a fairly minor squall which
will simmer down relatively quickly with fairly minor actions,"
Robert Prior-Wandesforde, an economist at Credit Suisse, wrote
in a note on Monday.
"If this remains the case, then a swift move to 65 against
the U.S. dollar is probable, which in turn should help focus
While India's current crisis has evoked parallels to 1991,
when it had to pledge gold to the International Monetary Fund,
the World Bank's chief economist on Monday said such comparisons
were unwarranted and India need not seek a credit line from the
"Several people have come to me (asking) are we back to
1991? That is completely a non-question because if you look at a
couple of numbers there is absolutely no comparison," Kaushik
Basu, a former senior Indian government official now at the
World Bank, said in New Delhi.
A record-high current account deficit of 4.8 percent of
gross domestic product (GDP) in the last fiscal year has made
India particularly vulnerable as funds leave emerging markets in
expectation that the U.S. Federal Reserve will soon scale back
its quantitative easing.
Net outflows from Indian bonds and stocks total $11.4
billion since late May. Still, India has reserves to cover about
seven months of imports, compared with just three weeks in 1991.
India's bond market has borne the brunt of the outflows,
with foreigners taking out around $10 billion since May 22. The
benchmark 10-year bond yield surged 35 basis points
on the day, to 9.23 percent.
Equity markets have remained relatively insulated with
outflows from the cash market at less than $100 million on
Friday, when the main stock benchmark fell about 4 percent, the
most in nearly two years. Heightened selling in equities could
exacerbate the rupee's fall, dealers said.
Mumbai's main stock index fell 1.6 percent on
The cost of insuring debt of State Bank of India, a
proxy for Indian sovereign debt, jumped on Monday to 14-month
highs as the rupee plunged. Five-year credit default swaps (CDS)
on SBI traded at 351 basis points, a 45 bps rise from Friday's
close, data provider Markit said.
Continued dollar demand by banks and oil refiners
contributed to the rupee's latest fall, dealers said.
Some dealers expect further dollar selling by the Reserve
Bank of India (RBI) as well as other measures to support the
currency. On Monday, however, traders said they did not see any
noticeable central bank dollar selling.
Traders seemed unconvinced about the efficacy of steps
unveiled last week to cut the current account deficit to 3.7
percent of GDP during the current fiscal year.
"Forex intervention will continue by the central bank.
Further measures are expected from the RBI but are unlikely to
be effective. The rupee is expected to touch 63 in no time,"
said Param Sarma, chief executive at Brokerage NSP Forex.
Finance Secretary Arvind Mayaram told Monday's Economic
Times that the government was not looking for now to take
further steps to tackle the rupee's fall, but wanted to see the
impact of its recent measures. ()
The rupee's tumble has fuelled expectations of more action
from the RBI, which last week curbed outflows from companies and
individuals, roiling stock and bond markets.
The yield on India's 10-year benchmark
government bond climbed as high as 9.26 percent, its highest
since Aug. 1, 2008, before the Lehman Brothers collapse.
The RBI set a cutoff of 12.2370 percent on 28-day cash
management bills on Monday. It had sold 35-day paper at 11.7056
pct last week.
"The priority is clearly rupee management. Pressure will
rise on the fiscal side with yields rising, but the government
can compress expenditure later," said Anjali Verma, economist at
PhillipCapital in Mumbai.
Many economists believe the RBI's liquidity tightening will
stay in place longer than initially expected, and many have cut
their economic growth forecasts for the current fiscal year.
India's economy grew at a decade-low 5 percent in the last
fiscal year, and some economists now see little improvement on
that in the current year, as political gridlock ahead of
national elections due by May limits New Delhi's ability to
enact structural reforms to attract long-term inflows.