The most striking thing about yesterday’s bloodbath in both the
Indian equity and the currency markets was the fact that were both
caught in a vicious cycle, with each dragging the other down.
A plunge in the rupee – yesterday’s fall was the second biggest in history – effectively accentuated foreign institutional investors’ losses on their equity portfolio and triggered stop-losses, which forced further sales, dragging markets even further down.
Like flotsam sucked into a whirlpool, the only way they could head was down. By the end of Thursday, investors were bleeding from a notional loss of about Rs 2 lakh crore.
And since yesterday’s sharp selloff went all the way around the world
– Wall Street too tanked over 3 percent overnight and Asian equity
markets are again starting Friday on the downside – the bad news seems
set to continue into today.
The Indian currency’s vulnerability is particularly heightened by the fact that among its emerging market peers, India runs a high current account deficit. That, compounded by the exaggerated aversion to risk, triggered the rupee’s slide.
On Thursday, the rupee fell 2.4 percent to 49.54 to the dollar, its lowest level in 28 months. Much of this was driven by global risk aversion, which saw a stampede into “safe haven” currencies like the US dollar and into US Treasuries. The US Fed action on Wednesday, unveiling the so-called Operation Twist but simultaneously flagging the risk of a global economic slowdown, accentuated the risk-off trade.
The dollar index, which tracks the greenback against the currencies of six US treading partners, is now at a seven-month high. The irony of investors flocking to a currency that the world has been talking down for more than three years now – and more so after the recent loss of the US’ AAA sovereign rating – is striking.
The surge in the US dollar overnight caused commodity prices to weaken across the board, but the beneficial effect of that won’t be felt after factoring in the rupee’s fall.
About the only asset class that fell even in rupee terms was gold, which plunged $70 dollars to a troy ounce overnight, although they’ve since rebounded from those levels. Gold futures are now trading a four-week low, which has had commentators wondering if the “gold rush” is over.
Analysts reckon that while gold still has a bit of upside, its performance over the past few days – when it fell in tandem with falling risk appetite – raises fundamental questions about the perception that it was beginning to behave like a “safe haven” currency.
A plunge in the rupee – yesterday’s fall was the second biggest in history – effectively accentuated foreign institutional investors’ losses on their equity portfolio and triggered stop-losses, which forced further sales, dragging markets even further down.
Like flotsam sucked into a whirlpool, the only way they could head was down. By the end of Thursday, investors were bleeding from a notional loss of about Rs 2 lakh crore.
The rupee's sharp fall has set off stop-losses on FIIs' equity portfolio. Indranil Mukherjee / AFP
The Indian currency’s vulnerability is particularly heightened by the fact that among its emerging market peers, India runs a high current account deficit. That, compounded by the exaggerated aversion to risk, triggered the rupee’s slide.
On Thursday, the rupee fell 2.4 percent to 49.54 to the dollar, its lowest level in 28 months. Much of this was driven by global risk aversion, which saw a stampede into “safe haven” currencies like the US dollar and into US Treasuries. The US Fed action on Wednesday, unveiling the so-called Operation Twist but simultaneously flagging the risk of a global economic slowdown, accentuated the risk-off trade.
The dollar index, which tracks the greenback against the currencies of six US treading partners, is now at a seven-month high. The irony of investors flocking to a currency that the world has been talking down for more than three years now – and more so after the recent loss of the US’ AAA sovereign rating – is striking.
The surge in the US dollar overnight caused commodity prices to weaken across the board, but the beneficial effect of that won’t be felt after factoring in the rupee’s fall.
About the only asset class that fell even in rupee terms was gold, which plunged $70 dollars to a troy ounce overnight, although they’ve since rebounded from those levels. Gold futures are now trading a four-week low, which has had commentators wondering if the “gold rush” is over.
Analysts reckon that while gold still has a bit of upside, its performance over the past few days – when it fell in tandem with falling risk appetite – raises fundamental questions about the perception that it was beginning to behave like a “safe haven” currency.
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