The Indian rupee came under pressure, led by a sharp uptick in Brent crude prices and surging Treasury yields, coupled with a strong dollar. The domestic unit was last quoted at 95.95 per dollar, down 0.2% in Thursday’s intraday trade.
Rising inflationary risk over the prolonged West Asia conflict pushed Brent prices to $103/bbl, and the dollar index firmed to a two-month high of 101.11, adding to the downside for the local currency. A firm greenback reduces the appeal of emerging market currencies for foreign investors.
Traders cited by Reuters said that state-run banks carried out dollar sales on behalf of the Reserve Bank of India to prevent the currency from weakening beyond the 96 mark against the US dollar.
Strong US data and treasury yield add to declines
S&P Global data showed US private-sector activity jumped to its highest level in more than five years, while services and manufacturing also showed improvement, adding to inflationary concerns. Inflation continues to hold above the US Federal Reserve’s target of 2%.
Following this, the yield on the 10-year US Treasury note climbed to 5%, its highest level since 2007, while Japan’s 10-year bond yield climbed to levels last witnessed in August 1996. Higher yields on developed market bonds increase the appeal of safer assets like US Treasuries.
“After the September Fed hike, we retain our out-of-consensus call for two more rate increases in October and December. Whereas hikes looked politically challenging for (Fed Chair) Warsh a few months ago, they now appear politically expedient,” Reuters quoted BofA Global Research as saying in a note.
Markets currently price in a 75% probability of a 25-basis-point rate hike by the Fed in October, up from 55% reported a week ago and 11% a month ago.
Domestic indices under pressure
In intraday trade, domestic benchmark indices came under sharp selling pressure as both Sensex and Nifty fell 1.5% each. The Nifty Midcap 100 was down 2%, while Nifty Smallcap 100 index fell 1.4% in intraday trading.
Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Investments, said, “The sharp spike in Brent crude above $102 and the US 10-year bond yield rising to 5.11% will weigh on the market today. So long as these two global headwinds remain, the prospects of a smart recovery in the market appear remote. The recent market trend has been sustained focus on the mid-and small-caps. Growth stocks in these segments are witnessing sustained accumulation, irrespective of their elevated valuations.”
Asian currencies under pressure
Other Asian emerging market currencies also depreciated against the dollar as treasury yields surged. Indonesian Rupiah was amongst the top losers; so far this year, the unit has weakened nearly 7%.
(With agency inputs from Reuters)
