Rupee Falls below 68 to Record; Stocks, Bonds Tumble

Its Financial Emergency

The rupee slumped 3.7 percent to 68.7350 per dollar in Mumbai. The currency, which dropped to an unprecedented 68.755 earlier, fell 2.9 percent on 27 August. It has lost 13.6 percent this quarter and 20 percent 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 percent government bonds due May 2023 jumped 16 basis points, or 0.16 percentage point, to 9.02 percent, according to the central bank’s trading system. The rate surged 52 basis points on 27 August.

India’s rupee plummeted more than 3 percent to a record on concern of a surge in oil prices will worsen the current account and push the economy toward its biggest crisis in more than two decades.

‘Crisis Proportions’

“India’s macro muddle is fast approaching crisis proportions,” Richard Iley, an economist at BNP Paribas SA in Singapore, wrote in a research report on 28 August. “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.”

Rising Risk

One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, jumped 153 basis points to 18.86 percent.

Credit-default swaps insuring the debt of State Bank of India, considered a proxy for the sovereign, against non-payment climbed 111 basis points this month to 371 as of Aug. 27, CMA prices show. The contracts jumped 64 basis points last quarter, the most since the three months to Sept. 30, 2011. MCX gold futures climbed to a record, as investors sought a store of value.

Three-month onshore rupee forwards fell 4 percent to 70.24 per dollar. Offshore non-deliverable contracts dropped 4.1 percent to 70.79. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.