Rupee Poised for Worst Month Since January as Fed Spurs Outflows

Expectations of a Fed rate hike has put the rupee under pressure.

India’s rupee was heading for its biggest monthly decline since January. (Photo: Reuters)

The rupee is headed for its biggest monthly decline since January as foreign funds exited local bonds. Funds turned cautious amid an emerging-market selloff, sparked by growing speculation that an interest rate hike is imminent in the US.

Overseas holdings of government and corporate debt fell by Rs 4,680 crore ($696 million) as of 30 May, after climbing for two straight months, according to National Securities Depository. The rupee weakened, along with emerging market currencies, after Federal Reserve Chair Janet Yellen said that a strengthening US economy would probably warrant higher borrowing costs “in the coming months.”

Heightened expectations of a Fed rate hike has unnerved investors, and that’s reflected on the rupee. The currency is likely to weaken further due to uncertain debt inflows.

Abhishek Goenka, CEO, India Forex Advisors

The Indian currency has fallen 1.3 percent in May to 67.2175 a dollar as of 11:25 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg, including a 0.1 percent drop on Tuesday. The rupee has dropped 1.6 percent this year in Asia’s worst performance after South Korea’s won. Goenka expects it to weaken to 69 by year-end.

Recent losses have also been fueled by a May 13 report that showed Indian exports contracted 6.7 percent in April from a year earlier, declining for the 17th month, while imports dropped 23.1 percent.

Sovereign bonds were set for the first monthly drop since January. The yield on notes due January 2026 climbed three basis points from the end of April to 7.47 percent, according to prices from the central bank’s trading system. It rose one basis point on Tuesday.