India’s rupee plummeted more than 3 percent to a record on concern a surge in oil prices will worsen the current account and push the economy toward its biggest crisis in more than two decades. Stocks and bonds plunged.
The U.S., France and the U.K. are considering limited military action against Syria after concluding the regime used chemical weapons against civilians, fanning concern unrest will disrupt Middle East oil supplies. The tension has worsened a rout that’s seen global funds pull $8.7 billion from local debt since end-May on bets the Federal Reserve will pare stimulus. An 8.7 percent jump in Brent crude this month is set to boost costs for India, which imports almost 80 percent of its oil.
The rupee slumped 3.7 percent to 68.7350 per dollar as of 10:33 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The currency, which dropped to an unprecedented 68.755 earlier, fell 2.9 percent yesterday. It has lost 13.6 percent this quarter and 20 percent this year, headed for the worst annual loss since a balance of payments crisis in 1991 forced the nation to pawn gold to pay for imports.
The yield on the benchmark 7.16 percent government bonds due May 2023 jumped 16 basis points, or 0.16 percentage point, to 9.02 percent, according to the central bank’s trading system. The rate surged 52 basis points yesterday. The S&P BSE Sensex (SENSEX) of local shares slid 2.6 percent to 17,506.27 today.
‘Crisis Proportions’
“India’s macro muddle is fast approaching crisis proportions,” Richard Iley, an economist at BNP Paribas SA in Singapore, wrote in a research report today. “Downward pressure on asset prices is unlikely to abate until the rupee becomes decisively cheap, maybe weaker than 70, or the authorities deliver ‘shock and awe’ tightening.”
India’s budget and current-account deficits are responsible for the rupee’s slide, Finance Minister Palaniappan Chidambaram said in New Delhi yesterday. The government is taking steps to contain the shortfall in the broadest measure of trade to within $70 billion in the year through March 2014, he added, compared with an unprecedented $87.8 billion the previous period.Prime Minister Manmohan Singh won a rare victory by passing a landmark bill through the lower house of parliament yesterday that expands the world’s biggest food program, a key plank of his party’s re-election strategy. The plan involves spending about 1.25 trillion rupees ($18.3 billion) in subsidies each year, potentially worsening the fiscal gap.
Rising Risk
One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, jumped 153 basis points to 18.86 percent.
Credit-default swaps insuring the debt of State Bank of India, considered a proxy for the sovereign, against non-payment climbed 111 basis points this month to 371 as of Aug. 27, CMA prices show. The contracts jumped 64 basis points last quarter, the most since the three months to Sept. 30, 2011. MCX gold futures climbed to a record yesterday, as investors sought a store of value.
Three-month onshore rupee forwards fell 4 percent to 70.24 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 4.1 percent to 70.79. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.-Bloomberg
