Indian rupee falling as emerging market assets are under new pressure amid higher crude oil prices, spectre of rising dollar value, and increased global trade tensions.
The Reserve Bank of India and its peers in other emerging economies have been forced to defend their currencies in the wake of a confluence of dollar-supportive events.
However, the RBI wasn’t seen actively intervening in the foreign exchange markets as it did on Friday.
The 10-year benchmark bond yield rose to 8.12 percent, its highest since Nov. 28, 2014 as a rise in global crude oil prices added to inflation concerns.
The Indian rupee falling to a life time low touched 72.4450 to the dollar on Monday pressured by solid support for the dollar thanks to strong U.S. jobs data on Friday. This has reinforced expectations of more rate hikes by the Federal Reserve.
The 10-year bond had ended at 8.03 percent on Friday and the rupee at 71.73 to the dollar.
According to senior forex analyst at a government bank, “RBI is not trying to defend any level strongly today. The next strong technical resistance is at 72/50-72.75 (to the dollar) level.”
Heightened fears that Washington will slap fresh trade tariffs on China also saw investors seek safety in the dollar and pull out of emerging market currencies.
Higher oil prices were a spoiler for both the Indian rupee and bonds. More than 2/3rd of crude oil is imported by India. Therefore, in case of any increase in global oil prices, it not only increases dollar demand by importers but also increases inflation concerns in India.
The RBI has raised its policy repo rate in two successive meetings by a total of 50 basis points as it aims to contain inflation to 4 percent in the medium term. The headline consumer inflation rose 4.17 percent in July from a year earlier and is expected to pick up momentum on higher crude prices and the weakening rupee.
Oil prices increased as U.S. drilling for new production stalled and as the market eyed tighter conditions once Washington’s sanctions against Iran’s crude exports kick in from November.