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The Indian debt segment has seen record foreign money outflows so far. Foreign portfolio investors (FPIs) have sold $8.4 billion in the debt segment as of October 15 – the highest in any calendar year for data available since 2002.
The outflow of $7.91 billion in the full calendar year 2013, and $6.36 billion in 2016, were two other instances when FPIs pulled out huge amounts.
US Treasury yields surging over the last several weeks has intensified the FPI sell-off in the Indian market. The US 10-year Treasury yields surged to 3.2 per cent this month from around 2.8 per cent in the last week of August. FPIs have pulled out $2.84 billion over the same period from India’s debt segment.
Also, FPIs have been selling in the equity segment as well. Their selling has intensified over the last few weeks in this segment. They sold $1.47 billion in equities in the past week alone. They have offloaded $4.27 billion worth of Indian equities so far this year. The sharp sell-off in the Indian equity markets last week followed the sudden fall in the US markets last Wednesday.
If FPIs continue to pull out from both the equities and debt market, then the rupee may continue to touch record lows.
A crucial juncture
The Indian rupee fell to a new record low of 74.48 against the US dollar last week on Thursday. But the currency had managed to recover from the lows as crude oil prices eased last week. But the party was short-lived.
The rupee, which surged to a high of 73.52 on Friday, lost momentum on Monday. It fell to a low of 74.07 before recovering and closing at 73.82 on Monday. This leaves the near-term outlook mixed, and the price action in the coming days will need a close watch.
A crucial long-term support for the rupee is at 74.6. The rupee will come under renewed pressure only if it breaks below this support. Such a break can drag the rupee to fresh lows of 75.5 or even 76 in the coming weeks.
But if the rupee manages to sustain above 74.6, a range-bound move between 73.5 and 74.6 can be seen for some time. A strong break above 73.5 can take the rupee higher to 72.9. A further break above 72.9 will then increase the likelihood of the currency strengthening to 72 and 71.8 over the short term.
Such a move will mark the end of the current fall and will turn the outlook positive for the rupee. It will also leave the possibility high for the currency to move towards 70.2 over the medium term.
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