MUMBAI: The rupee hit a fresh intraday low of 95.96 per dollar on Thursday amid aggressive demand for the greenback among importers, and maturing of offshore non-deliverable forward (NDF) positions, dealers said. The rupee later recovered sharply to around 95.58 after reports emerged that the government was considering a reduction in taxes on foreign investors investing in Indian bonds, a move aimed at attracting foreign inflows.
The rupee eventually settled at a fresh closing low of 95.77 per dollar.
The previous day’s close was 95.71 per dollar.
“The rupee was under pressure because of importer demand for dollar, and maturing of positions in NDF,” said a dealer at a state-owned bank. “The news of tax cut led to discovery towards 95.50 per dollar,” he added.
The gains in rupee proved short-lived after data showed India’s wholesale price index (WPI) inflation surged to 8.3 per cent in April, sharply above market expectations of around 4.4 per cent. The inflation print rekindled concerns over imported price pressures.
“The first sign of the impact of (the US-Iran) war on the Indian economy has been seen in the WPI inflation number for April, which came at 8.3 per cent. This is a direct result of the global developments that have manifested on the oil front,” said Madan Sabnavis, chief economist at Bank of Baroda.
“While WPI inflation is not a target for the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC), it is known that with a lag, these prices also get transmitted to the Consumer Price Index (CPI) component through higher input costs,” he added.
Dealers said the RBI intervened by selling dollars near the 95.96 level.
“The market was watching the Donald Trump-Xi Jinping Summit when the news came that the Indian government is considering a significant reduction in taxes paid by foreign investors on the Indian bonds, as authorities sought to align policies with global norms and attract inflows,” said Anil Kumar Bhansali, head of treasury and executive director, Finrex Treasury Advisors LLP.
“However, as India’s wholesale inflation rose to 8.3 per cent, and this news also came simultaneously, the rupee fell from 95.58 to 95.75 levels almost immediately,” Bhansali added.
News agency Bloomberg reported on Thursday that on the recommendation of the central bank, the Centre is considering to cut taxes paid by foreign investors on bonds, aimed at aligning policies with global norms and attract inflows.
The rupee has remained under pressure in recent sessions amid persistent strength in the dollar index, elevated crude oil prices due to tensions in West Asia, and sustained foreign portfolio outflows from domestic equities. Market participants said intraday volatility has risen significantly, offering opportunities to both importers and exporters to hedge positions.
Meanwhile, the benchmark 10-year government bond yield softened by 3 basis points (bps) to 7.02 per cent on the reports of possibility of fresh foreign inflows into the debt market if tax norms are eased for overseas investors.
“The bond yield moved by 3 bps after the reports of tax cut. The market is now looking at a rate hike. The yields are not expected to soften significantly from here,” said a dealer at a primary dealership.
Source: Business Standard
