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The Indian rupee suffers biggest one day drop in 20 years
by James Phillipps on Aug 28, 2013 at 07:48
The Indian rupee suffered its biggest one day loss in 20 years as fears about Syria and rising oil prices pile more pressure on the currency.
The rupee slumped by 3.1% to 68.31 against the US dollar, after almost touching 69 in intra-day trading.
The currency is now down 19.5% against the dollar since the start of the year and by 13.5% in the second quarter alone. The yield on 10 year Indian sovereign debt has surged by more than 60 basis points in the last two days to stand at 8.96%.
Rising oil prices pile further pressure on India’s embattled economy, which is running a hefty current account deficit. Its economy grew by 4.6% in the second quarter, which although high by western standards, was the lowest quarterly expansion in four years.
Sara Yates, global currency strategist at JP Morgan Private Bank, said: ‘Although the fall in the currency is beneficial for the current account deficit, it may have an adverse impact on the capital account surplus if the currency falls too far.
‘India has been one of the biggest recipients of equity flows in EM Asia since January 2010. These flows are very liquid and are likely to have been largely un-hedged. This means that even though the Sensex is broadly flat over this period, the substantial fall in USD/INR is likely to have hurt foreign investors.’
She added: ‘The more the currency depreciates, the greater the chance that foreign holders of the equity market capitulate on their position. However, the greater the outflow of foreign funds, the smaller the capital account surplus, the harder the current account is to finance and the more pressure falls on the currency, creating a vicious spiral of financing concerns.’