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Importers rushing for cover, markets looking for rate cut.

Date: 05-03-2020
Subject: Importers rushing for cover, markets looking for rate cut
Indian importers rushed to cover their payment liabilities after the rupee shed more than 2 per cent against the dollar this week, even as local bond yields slid to the lowest in more than three years on expectations Mint Road will align its policy stance with other central banks and lower rates.

Government agencies also sought to cover their payables in the aftermath of the rupee’s decline, precipitated by the flight of capital from Emerging Markets in the aftermath of the Covid-19 scare. Some drug makers also reportedly cancelled their export forward cover due to the likely export curbs on 12 key bulk drugs, putting added pressure on the local currency.

The rupee closed at 73.22 to a dollar, mildly stronger than Tuesday’s closing of 73.30 on visible regulatory intervention. The currency had hit a low of 73.62/63.

“History suggests that the sharp bout of weakness in a short span is nothing new for the rupee when the EM risk perception deteriorates,” said B Prasanna, ICICI Bank’s group head for global markets, sales, trading and research. “Given the economic uncertainty around the coronavirus and emergency measures now being contemplated around the world, the risk perception will remain elevated, favouring the dollar against high yielders, including the rupee.”

The US Federal Reserve’s 50-basis-point policy rate cut has also triggered concerns of a rapidly slowing economy. The 10-year US bonds yielded below 1 per cent for the first time.

But bonds rallied Wednesday, pushing down the 10-year benchmark bond yield to 6.23 per cent, the lowest since December 2016.

“The bond yields have fallen on expectations of a rate cut, which can happen this month itself ahead of the scheduled policy announcement,” said Care ratings chief economist Madan Sabnavis. “The central bank has given enough indication in its statement Tuesday.”

A likely reduction in rates will bring the focus back on easing the cost of money in the economy after Mint Road appeared to have halted the current round of easing, with inflationary expectations lately spiking.

"Given the fear that the spread of corona virus is going to impact GDP materially, markets are now baking in a high probability of 25 to 40 bps cut in April policy if not even before it," said Harihar Krishnamoorthy, treasury head at FirstRandBank.

In the currency market, the sharp currency moves were not anticipated by importers.

“Importers were caught off guard. They normally don’t hedge beyond a month. They are now hedging their medium term positions and also rushing to buy dollars to pay their import liabilities,” said KN Dey, founder of United Financial, a forex advisory firm.

Companies and public sector firms raising funds externally needed to hedge their forex exposure too.

“The markets turned negative …due to the coronavirus related news flow. Eventually, RBI intervened in the currency market which helped the rupee recover from 73.62 to 73.22,” said Shrikant Chouhan, senior vice president, equity technical research, Kotak Securities.

ING Bank NV believes that the local currency may fall to as low as 75 per dollar, surpassing its life-time low of 74.47 seen on October 11, 2018, according to Bloomberg.

Source: economictimes.indiatimes.com

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