The risk of overseas investors in rupee bonds getting caught wrong-footed and weakening India’s currency further is surging as losses this month outpace Asian peers, amid mounting geopolitical tensions in the region.
A sharp drop in the rupee may wipe out most of the profits for offshore investors as they do not usually hedge currency risk for short-term debt investments into the country, according to a chief executive officer. Any selloff in foreign holdings of Indian corporate and government bonds may set off a spin which weakens the currency further.
The surge in inbound investments into rupee bonds was largely driven by carry trades, adding to fears of a quick reversal in flows if the drop in rupee is not checked. The currency slumped more than 3% against the greenback this month, setting it up for its second-worst monthly loss in four years, as India escalated tensions with Pakistan by revoking seven decades of autonomy for the state of Kashmir. That added to turmoil in Emerging Markets stemming from the US-China trade spat.
While the rupee has depreciated in seven of the past 10 years, most of the decline was in a calibrated manner. Record foreign exchange reserves of USD430b and the most politically stable government in three decades give policymakers power to control the drop. – Bloomberg News.
The US Dollar Index (DXY) dipped 0.04% to 97.946, the euro shed 0.04% to USD1.1139, and the pound remained at USD1.2060 on Wednesday (14 August). The yen strengthened 0.78% to 105.91 per dollar.
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