Rupee weakens over 40 paise in mid-day trade to 85.97 against dollar as outflows weigh

Indian rupee

Indian rupee depreciated sharply by around 0.5 percent, or close to 40 paise during mid-day trade on June 4 to slip to 85.97 against the US dollar, likely impacted by rate cut expectations during this week's MPC review and foreign outflows from bond and equity markets.

Currency experts said given a wide expectation of a 25 basis points (bps) rate cut by the Reserve Bank of India (RBI) on June 6 is dragging down forward premia rates, due to narrowing of rate differential between India and US bond yields. Usually, when the forward premia goes down, spot rates in the forex market goes up, currency experts said.

Anil Kumar Bhansali, Head of Treasury and Executive Director at Finrex Treasury Advisors said the rupee is expected to trade between 85.35-85.85 against the US dollar in the near term.

The Rupee had closed at 85.5925 against the US dollar on June 3, however, the Indian currency opened 16 paise lower on June 4 following outflows from foreign investors in equities and bonds.

The rupee has been under pressure during last few sessions due to dollar demand, equity outflows and a dip in the dollar index, currency experts have said.

During the trading session of June 3, FIIs had sold shares worth Rs 2,854 crore and DIIs purchased shares worth Rs 5,908 crore. For the year so far, FIIs have been net sellers of shares worth Rs 1.27 lakh crore, while DIIs have net bought Rs 2.86 lakh crore worth of shares.

Moneycontrol also reported on June 3 that outflows by foreign portfolio investors (FPIs) from government securities has been highest so far this quarter since the inclusion of Indian bonds in global bond indexes, likely due to narrowing interest rate differential between India and US 10-year bonds, said experts.

According to the Clearing Corporation of India’s (CCIL) data, foreign investors pulled Rs 25,543.68 crore in the current quarter between April 2 and June 3 from Indian bonds under the Fully Accessible Route (FAR), which turned out be first outflow reported in any quarter since the inclusion announcement of government bonds in global bond indexes.