MUMBAI: The rupee rose on Thursday after suspected central bank intervention to prop up a currency wounded after data showing accelerating inflation threatened to further undermine confidence in an economy growing at its lowest pace in a decade.
The data is also raising prospects of India entering a dangerous cycle where a weaker currency creates more inflation, which in turn hits confidence and further depresses the rupee.
The unease in markets is being exacerbated by renewed fears of an early end to tapering by the US Federal Reserve and comes even as central bank Gov. Raghuram Rajan on Wednesday tried to calm investors’ nerves.
However, confidence derived from Rajan’s comments was partly wiped out after data on Thursday showed India’s wholesale price index rose to an eight-month high in October.
The return of inflation fears led to a so-called devolvement in the sale of 2020 bonds at the weekly auction, meaning the RBI rejected some bids and forced primary dealers to buy the debt at the prescribed cut-off stipulated by the central bank.
“It (high inflation) suggests policy rates will remain elevated and RBI may not weed itself out of a hawkish tone anytime yet,” said Suresh Kumar Ramanathan, head of regional interest rate and FX strategy at CIMB Investment Bank in Kuala Lumpur.
“It’s also disappointing that past rate hikes have not been fully effective in arresting inflation, which suggest that much of the weakness in WPI may have been due to exchange rate related factors, rather than supply and demand factors.”
The rupee closed at 63.11/12 to the dollar versus Wednesday’s close of 63.30/31 following suspected late intervention from the central bank. The trading session was volatile, with the currency rising as high as 62.9525 and dipping as low as 63.34.
Benchmark 10-year bond yields rose 10 basis points to 9.02 percent.
The RBI devolved Rs.4.61 billion of the total Rs.40 billion of 8.12 percent 2020 bonds available for sale at the weekly auction.
Indian markets have experienced a tough week, marked by rising volatility in global markets after stronger-than-expected US jobs data sparked concerns about an early tapering of the Fed stimulus, sending the rupee to a two-month low on Wednesday.
Those same fears had hit Indian markets badly when they first surfaced over the summer, pushing the rupee to a record low of 68.85 to the dollar in late August, although the currency has recovered 12.9 percent since then.
Investors worry markets could be headed for a repeat, except with inflation replacing the current account deficit as a key challenge to the economy.
Data on Thursday showed wholesale inflation rose to an eight month high of 7 percent. It came after data on Tuesday showed consumer price inflation accelerated more than expected.
Rajan on Wednesday sought to provide reassurance about inflation, calling the downward trend in core consumer prices comforting despite acknowledging that food prices were “worryingly high”.
The RBI has already raised interest rates twice for a total of 50 basis points since September and although analysts found Rajan’s comments heartening, they said the RBI would continue to be guided by the data ahead of the next policy review in the middle of next month.
That will leave the RBI with a tough decision about how to balance the needs of a slowing economy at a time of continued inflationary pressures.
“We are still skeptical regarding the rupee’s fate, as it relates to the external deficit and the ability of the RBI to balance growth and inflation trade-offs,” Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong, said in a note.