Rupee slides 43 paise on risk aversion ahead of Budget, Fed statement

Govt bond yields decline ahead of Budget statement as traders feel the fall in prices over the past week had been overdone

The rupee weakened sharply versus the dollar on Tuesday, as investors turned risk averse and sought the safety of the US currency ahead of two crucial events on Wednesday – the Union Budget and the Federal Reserve’s monetary policy statement.

The domestic currency settled at 81.93 per dollar against 81.50 on Monday. Intraday, the rupee weakened past the psychologically significant 82 per dollar mark, hitting a low of 82.07 per dollar.

Government bond yields declined ahead of the Budget statement as traders were of the view that the fall in prices over the past week had been overdone, dealers said. Yield on the 10-year benchmark bond settled six basis points lower at 7.34 per cent. Bond prices and yields move inversely. In the previous week, the 10-year bond yield had climbed to its highest levels since early November as the market braced for heavy supply of debt in the coming year.

In the Budget, the Centre is widely expected to announce a reduction in its fiscal deficit target to 5.8-5.9 per cent of GDP for the next financial year. A higher-than-expected fiscal deficit target could cause bonds and the rupee to weaken, especially as India’s sovereign rating is constrained by its high debt-to-GDP ratio.

Tuesday’s low was the weakest intraday level for the rupee versus the US dollar since January 10, Bloomberg data showed. So far in 2023, the rupee has gained one per cent against the dollar.

While the Fed is seen reducing the quantum of its rate hikes, traders were apprehensive of the US central bank signalling that interest rates would remain high for a longer than expected period in the world’s largest economy. Higher US interest rates propel global investment to the country, leading to a stronger dollar.

“Strong DXY (dollar index), USD/CNH (dollar-yuan) and equity outflows from foreign banks were heard which pushed the rupee lower. Offshore NDF (non-deliverable forwards) levels later started moving higher as well, triggering several stop losses which were placed around 81.85/90 zone,” Kunal Sodhani, Shinhan Bank vice-president (Global Trading Centre) said.

“For USD/INR, 81.50 acts as a good base while 82.30 acts as a first important resistance followed by 82.55 levels,” he said.

The US dollar index was at 102.50 at 3:30 p.m. IST as against 101.68 at the same time on Monday.

Purchases of the US dollar by foreign banks, including a large UK-based bank, likely on account of overseas investors’ exit from Indian equities also dragged the rupee lower on Tuesday, dealers said.

“Event risks in the next four days made traders jittery and they bought dollars. A major UK based bank was heard buying dollars for equity outflows of FPIs. The market has to counter the budget, FOMC tomorrow, BoE (Bank of England) and ECB (European Central Bank) statements on 2nd and NFPR (US jobs data) on 3rd,” Anil Kumar Bhansali, head of treasury, Finrex Treasury Advisors said.