Rupee Sinks To Second Worst In Asia Even As India Tops Overseas Inflows This Quarter

The Indian currency has weakened to second worst in Asia since July after a strong start to the year, despite the country's stock market attracting the highest inflows in the region.

In what can be called as a tumultuous current quarter for the Asian markets, India has emerged as the top destination for global funds. Inflows into the equity segment come despite the hike in capital gains tax while the country's debt enjoyed the inclusion benefits.

But the local currency, which gets a cushion from the overseas inflows, has not reaped its benefits amid continued decline in the US treasury yields and the unwinding of Japan's yen carry trades.

The sharp rise in JPY is causing a massive unwind of Yen carry trade positions and contributing to the sharp decline in US stocks, according to Kunal Sodhani, AGM (vice president), Shinhan Bank India. "This can lead to more selling pressure on US stocks and even more declines in the short term."

The rupee continued to hit record low on Monday as the local currency fell to 83.83 against the greenback. The local currency has now become the second worst performing currency in Asia since the beginning of July, ahead of the Taiwan dollar.

The treasury yields fell to 3.72% on Monday while the Asian stocks were on a rout following the unwinding of carry trade in the Japanese yen. The dollar index, which gauges the greenback's strength against the six major currencies, fell to 103.00, the lowest level since March 12 on Monday.

The fifth-largest stock market in Asia attracted overseas investments worth $3.56 billion so far during July-September, a significant amount that far exceeds the second-largest market in the region. Japan remained the second seeing an inflow of $527 million during the quarter, according to Bloomberg data.

A significant portion of these inflows have entered the equity segment, a quarter marked by a hike in the long and short-term capital gains tax along with an increase in the securities transaction tax in the union budget. During the quarter so far, the country has seen an inflow of $3.75 billion in the equity side.

The sovereign debt segment attracted flows worth $3.1 billion during the quarter aided by the paper's inclusion in the JPMorgan Chase & Co.'s benchmark emerging-market index.

Going forward, some developments can impact FPI flows, according to V K Vijayakumar, chief investment strategist, Geojit Financial Services Ltd.

The sharp drop in job creation in the US and the rising unemployment indicates there is a very high possibility of a rate cut by the Fed in September, he said. "Even though this is positive for FPI inflows into emerging markets like India, FPIs may think of pulling more money out of India since India is the most expensive emerging market now."