Rupee hits record low, bond yields jump on outflow fears

MUMBAI: The rupee on Monday fell by a massive 97 paise to breach the 61-mark to 61.19, a new all-time low, against the dollar in early trade at the Interbank Foreign Exchange market, on heavy demand for the American currency amid capital outflows.

Forex dealers said dollar firming up against other currencies in overseas markets, mainly put pressure on the domestic currency to touch an all-time low. The local currency had plunged to 60.76 intraday on June 26.

The rupee had declined by nine paise to 60.22 on Friday and the fresh fall was led by a steep rise in crude oil prices which surged over $100 in overseas markets.

The better-than-expected US job report for June may send emerging markets, including India, into a tizzy as the report card could prompt US Fed to start tapering its $85-bn monthly bond purchase plan.

Foreign investors have pulled out nearly Rs 12,000 crore from Indian equity markets in June.

However, investors will also keep a close eye on the earnings season with Infosys kicking off the quarterly earnings show on Friday. Analysts say better earnings could help revive market sentiment.

Bond yields also jumped on fears that foreign investors would continue to sell rupee debt. The 10-year yield rose as much as 13 basis points to 7.63 per cent from its previous close.

The Reserve Bank of India may be forced to announce some measures in the next few days or weeks to arrest the rupee's slide.

Some of the steps may include the much-anticipated direct funding of crude oil purchase by IndianOil, floating NRI bonds, and reducing the overnight exposure of banks to curb speculation, said people familiar with RBI's thinking.

Indeed, if interest rates in the US, which have risen by more than 100 basis points in past two months, continue to advance due to the strengthening economy, India may have to follow the example of Indonesia - which also runs a current account deficit - and raise interest rates.

The rupee is the worst-performing Asian currency as foreign funds pulled out $5.4 billion from Indian debt in June.

The government and the central bank have been trying to curb demand for gold, one of the main causes of aggravating external deficit, by imposing stringent cash conditions on importing the metal and also raising the import duty on it.

India's foreign exchange reserves fell $3.2 billion in the week to June 28, to $284.6 billion.