India’s rupee plummeted the most in two decades to a record as a surge in oil prices threatened to worsen the current account and push the economy toward its biggest crisis since 1991. Bonds fell.
The U.S., France and the U.K. are considering limited military action against Syria after concluding the regime used chemical weapons against civilians, fanning concern unrest will disrupt Middle East oil supplies. The tension has worsened a rout that’s seen global funds pull $8.7 billion from local debt since end-May on bets the Federal Reserve will pare stimulus. A 7.4% jump in Brent crude this month is set to boost costs for India, which imports almost 80% of its oil.
“The market is in a super-panic stage,” said Samir Lodha, senior partner at QuantArt Market Solutions Pvt. in Mumbai.
The rupee slumped 3.9% to an unprecedented 68.8450 per dollar in Mumbai, the biggest drop since 1993, according to prices from local banks compiled by Bloomberg. The currency lost 13.7% this quarter and 20.1% this year, headed for the worst annual loss since a balance of payments crisis in 1991 forced the nation to pawn gold to pay for imports.
The yield on the benchmark 7.16% government bonds due May 2023 jumped 18 basis points, or 0.18 percentage point, to 8.96%, according to data from the Clearing Corporation of India Ltd.’s website. The S&P BSE Sensex of shares closed 0.2% higher at 17,996.15 after falling earlier to the lowest level since September 2012. MCX gold futures climbed to a record today, as investors sought a store of value.
“India’s macro muddle is fast approaching crisis proportions,” Richard Iley, an economist at BNP Paribas SA in Singapore, wrote in a research report today. “Downward pressure on asset prices is unlikely to abate until the rupee becomes decisively cheap, maybe weaker than 70, or the authorities deliver ‘shock and awe’ tightening.”
India’s budget and current-account deficits are responsible for the rupee’s slide, Finance Minister Palaniappan Chidambaram said in New Delhi yesterday. The government is taking steps to contain the shortfall in the broadest measure of trade to within $70 billion in the year through March 2014, he added, compared with an unprecedented $87.8 billion the previous period.
Prime Minister Manmohan Singh won a rare victory by passing a landmark bill through the lower house of parliament on Aug. 26 that expands the world’s biggest food program, a key plank of his party’s re-election strategy. The plan involves spending about 1.25 trillion rupees ($18.3 billion) in subsidies each year, potentially worsening the fiscal gap.