MUMBAI (Reuters) – The rupee dropped to a record closing low on Monday, while bond prices gained in a volatile session marked by a sharp rise in global risk aversion and higher-than-expected domestic inflation data that reduced expectations for monetary easing.
The uncertainty sparked by the aftermath of Greek elections and concerns about China’s economy are exposing the vulnerability of Indian markets at a time of deep concerns over the country’s economy and its fiscal standing.
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Foreign outflows have been a particular concern, in light of a current account deficit that reached 4.3 percent of gross domestic product as of the December quarter.
Clouding the picture further, data on Monday showed wholesale price inflation for April rose to 7.23 percent, above expectations, at a time when economic growth has slumped to a near three-year low.
However, analysts said the data was at least tempered by the more muted gains seen in core inflation, while markets could see support should the Reserve Bank of India continue intervening in foreign exchange markets and buying bonds.
“If we see more softening in core prices, the headroom for the RBI to support growth more is likely to expand, especially after the recent weak production numbers,” said Siddhartha Sanyal, chief India economist at Barclays Capital.
“The central bank, however, is still somewhat cautious about inflation and the potential impact of more rate cuts on inflation expectations.”
After a strong start in January and February, Indian markets have tumbled, which many analysts attribute to a poorly-received fiscal budget unveiled in mid-March as well as a controversial set of taxation proposals for foreign investors.
The government’s fiscal standing and a perception of slowing policy reforms remain key risks, while the central bank’s response will also be critical for the outlook in markets.
Though few analysts expect the RBI to cut interest rates at its policy meeting next month, analysts say the central bank could at least seek to tackle a severe cash crunch via open market operations or a cut in the cash reserve ratio.
Those liquidity hopes helped benchmark 2021 bonds, with yields falling 4 basis points to 8.52 percent, and by expectations for a new benchmark bond to be sold at Friday’s auction.
After the markets’ close, the RBI said it would buy up to 120 billion rupees of debt on Friday.
The 1-year OIS rate ended unchanged at 8.04 percent, while the 5-year OIS rate fell 3 bps at 7.48 percent after the data.
“Core inflation is still below 5 percent, so the data does not change policy expectations much,” said Sandeep Bagla, executive vice-president at ICICI Securities Primary Dealership Ltd, referring to WPI.
“We expect liquidity infusion measures to continue.”
The BSE Sensex dropped to its lowest close since January 16, tracking a sharp fall in European shares.
Banks such as HDFC Bank led decliners, in a session also marked by the momentary stop in the execution of orders of Nifty futures in the National Stock Exchange.
The rupee dropped to a record closing low of 53.96/97 to the dollar, very close to breaching the psychologically key 54-level and not far from the record low of 54.30 hit in mid-December.
The falls came despite suspected intervention from central bank in the afternoon.
The one-month offshore non-deliverable forward contracts were at 53.95, while the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 54.12 on a total volume of 4.4 billion.
(Writing by Rafael Nam)