The rupee slumped yet again to find a fresh depth beyond 66 a dollar on Tuesday, triggering a collapse in stock markets.
After tumbling to 66.30, the rupee closed at 66.24/25 a dollar. The Indian currency had closed at 64.30/31 on Monday.
As the rupee dived stocks tanked nearly 600 points on the Bombay Stock Exchange.
The combined effect of the rupee and market fall saw yields on government bonds rise sharply. The benchmark 10-year bond yield jumped by 44 basis points to 8.78 per cent, its biggest rise since the Reserve Bank of India unveiled its liquidity-tightening exercise on July 15. The bond prices have fallen despite the RBI announcing on Monday that it would buy $1.24 billion worth of government bonds on August 30 through an open market operation.
A depreciated rupee also sent the price of pure gold of 99.5 per cent purity shot up by Rs.820 to a record high of Rs.32,585 per 10 gram on the Mumbai bullion market. Pure gold of 99.9 per cent purity spurted by Rs.810 to close at Rs.32,730 per 10 gram. Silver ready rose by Rs.1,940 to finish at Rs.56,670 a kg in Mumbai.
A combination of external and internal factors has done in the rupee. If an imminent western intervention in Syria sent currencies across Asia hurtling down against the greenback, the passage of a $20 billion plan to provide cheap grains to the poor by the Lok Sabha on Monday escalated concerns over the ability of the government to control the rising fiscal deficit. All these hurt rupee, and, as a consequence, the stock markets.
The S&P BSE Sensex closed at 17968.08 with a sharp fall of 590.05 points or 3.18 per cent.
Except information technology stocks, which gained marginally by 0.16 per cent, all other sectoral indices ended in the red.
Bank stocks were the worst hit with a fall of 5.34 per cent followed by capital goods (4.71 per cent), power (4.51 per cent), realty (3.95 per cent), PSUs (3.80 per cent), metal (3.52 per cent), fast-moving consumer goods (2.99 per cent), and automobiles (2.59 per cent).
The Nifty index of National Stock Exchange (NSE), too, dropped by 189.05 points or 3.45 per cent to close at 5287.45.
“With the Lok Sabha giving its approval to provide cheap grains to the poor, there are concerns that India’s fiscal deficit will balloon further,” said Amar Ambani Head of Research India Infoline (IIFL).
Already, the economy was reeling under the impact of a cut in Plan expenditure to contain fiscal deficit. “Now, any spending on food close to the election time will make matters worse for a fiscal deficit,” he added.
Selling pressure accentuated fiercely after the rupee tumbled to breach the 66-mark against the dollar. “Although these weren’t enough, Fitch Ratings has also warned of a downgrade if the country is unable to meet fiscal deficit target,” pointed out Mr. Ambani.
“The strength of the dollar is wreaking havoc on the Indian markets. This is even after the government has taken a steadfast approach to approving infrastructure projects worth Rs.1.83 lakh crore. We expect the market to be range-bound at current levels,” said Shrinivas Viswanath, Cofounder, RKSV, a leading broking firm.