The Hindu Business Line : Rupee weakens on stock market crash, oil prices

Impact
Yen rise not to have major impact on big corporates.
Mid, smaller companies likely to be hit.
As volumes in carry trade are not large, impact will not be significant.

Our Bureau

Mumbai, March 13 As the domestic stock market crashed by over 700 points, the reverberations were felt in the financial markets as well, although on a lower scale. The fall in the Sensex capped the gains of the rupee, which closed around 10 paise lower against the dollar.

In the global currency markets, the Japanese yen touched a 12-year high against the dollar and the Swiss franc touched an all time high against the dollar. Global crude prices flared up to touch $110 per barrel.

According to forex dealers, the rupee’s depreciation was purely because of the slump in the stock market and high oil prices. The forex market, in fact, saw strong IPO-related dollar inflows.

The bond market was largely unaffected by the downturn in the equities and bond prices would remain rangebound in the next few days, dealers said.

For the last three weeks, the dollar has weakened against currencies like the euro, Swiss franc and yen, but gained against currencies like rupee and certain regional currencies like Korean Won, said Mr Hitendra Dave, Co-Head, Global Markets, HSBC.

“The rupee has weakened purely because of capital outflows and because of oil prices going up,” he said.

YEN SURGE: LITTLE impact

The yen and Swiss franc are currencies with low interest rates. Often corporates convert their dollar loans into yen to take advantage of the interest rate differential.

Therefore, they are also known as carry trade currency. But the current surge in the yen against the dollar is not likely to have a major impact on Indian corporates, as they would have already hedged the yen-dollar risk. Also, as the volumes in the carry trade are not large, the impact on corporates would not be significant, said dealers.

“On an overall basis, while the yen has appreciated against the dollar, the rupee has also gained against the dollar. Therefore, it is unlikely that corporates who have taken yen loans will be hit much. But it will depend on individual cases,” Mr Dave said.

The mid and small corporates are likely to be hit harder, said Mr P.V. Rao, Chief General Manager, Treasury, IndusInd Bank.

“Large corporates will not be affected by the appreciation of the yen as most of their derivative contracts are in the dollar-rupee. However, in the case of mid- and small corporates, their rupee liabilities have been converted to the Japanese yen and the Swiss franc, which have substantially appreciated against the dollar since the sub-prime crisis,” he said.

Contradictory signals

According to Mr Vijay Anand, Associate Vice-President, Development Credit Bank, the bond market should have rallied taking cues from the equity markets, but it did not happen. “There are contradictory signals. Though the US is surrounded by a plethora of problems, Asia and Europe are also facing inflation and growth rate pressures. That is why the bond market is likely to move in a narrow range till the uncertainty is over,” he said.

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