Gold Silver Reports — Dollar Shorts Take it On the Chin as Rupee Falls 39 Paise — Overseas funds, foreign and private banks lost money as their bullish bets on the rupee backfired at least for now amid rising geopolitical tension between India and Pakistan.
Investors who were selling dollars in the currency forwards market booked losses with the rupee depreciating sharply against the dollar in the spot market. The Indian ar my said Wednesday it had conducted surgical strikes overnight at several terrorist camps along the Line of Control to pre-empt infiltration by terrorists.
The rupee fell 48 paise, or 0.72%, to an intra-day low of 66.95 per dollar as overseas investors sold local bonds and equities, show data from CCIL. It closed at 66.86 per dollar versus 66.47 a day earlier. The benchmark bond yield jumped five basis points, pushing prices down.
During the trading session, the Reserve Bank of India is said to have intervened to curb intraday volatility as some state-owned banks bought the rupee.
“Currency market outlook has changed overnight due to sudden cross-border tension,“ said Keta Kurkute, VP-Forex Advisory at Mecklai Financial Services, a currency risk management firm.“Investors are now seen going long on the dollar, reversing their earlier stance. Volatility will rise in the coming days amid escalating geopolitical tension.“ The rupee may depreciate to 67.50 against the dollar in the next few days if the situation with Pakistan worsens, some dealers said. A sharp dip triggered stop-losses for investors, who short-sold the dollar in the forwards market.
Some overseas investors, who were enjoying the luxury of unhedged positions, have started protecting their investments in India. Hedging currency comes at a cost, eating into their investment returns.
“The market was caught on the wrong foot as carry traders were short USD and had to run for cover as prices spiked,“ said Anindya Banerjee, a currency analyst at Kotak Securities.“Spreads between onshore and offshore forwardfutures narrowed. Traders would be keen on buying local bonds into the correction, ahead of the RBI monetary policy .“
Some investors rushed to hedge with the premium rising to 367 paise from 351 paise a day ago in the offshore derivative market, a popular platform for foreign portfolio investors.
During the Pokhran nuclear test in May 1998, seen as a sign of India’s might at the cost of global economic sanctions, the rupee plunged 6.42%, or Rs 2.55, within a month.
During the Kargil war in May 1999, when India vanquished Pakistan, the rupee lost 1.26%, or Rs 1.01, to the dollar in about 45 days.
A warlike situation does not look like a strong possibility as market participants expect only a temporary upheaval.
“Barring such an event (surgical strike), we can expect normalcy to return soon,“ — Neal Bhai Reports