Rupee has fallen 7.5 per cent against the US dollar so far this year.
But it is not the only currency to face the heat. There is bloodbath in other emerging market currencies too. The South African Rand has fallen 17 per cent against the greenback so far this year. Russian Rouble, Turkish Lira and South Korea’s Won are down 6-7 per cent and Brazil’s Real is down 4.7 per cent.
The latest round of currency weakness in these countries is accompanied by foreign investors pulling money out of debt instruments.
With the US Fed Chairman hinting at a rollback in stimulus measures a few weeks ago, bond investors are nervous. There are fears that as foreign portfolio flows into emerging nations dry up, the currencies of emerging nations could weaken, lowering bond returns.
Yield differential
The narrowing of the difference in bond yields of emerging markets and the US could also account for the pull-out from emerging market bonds. With the Standard & Poor’s Rating Service upgrading the outlook for the US credit rating to stable from negative, the demand for US treasuries is high. On Tuesday, the 10-year US treasury yield hit a 14-month high of 2.266 per cent.
“The rise in the US 10-year treasury yields has reduced the yield differential with the Indian bonds. It is reducing the arbitrage opportunity for the FIIs that are investing in India,” says Abhishek Goenka, Founder and CEO, India Forex Advisors
In contrast, the economies of the emerging markets are seeing bond yields fall with a rate cut on cards.
Outflows from emerging market debt funds totalled $1.52 billion in the week ending June 5 according to a report from EPFR Global, a global fund-flow tracking company.
In India, so far in June, FIIs have pulled out Rs 12,114 crore leaving their net investment for the calendar year in the debt market at Rs 11,932 crore.
However, it is not just the indications on slowing down of QE measures that are weighing on currencies of emerging markets, there are internal problems as well.
Macro troubles
For instance, Rand’s weakness follows South Africa’s huge current account deficit plus the labour troubles. Brazil’s Real has been battered by the country’s worsening fiscal position, high inflation and slowdown in China — the country’s key export market. And for India, it is its ballooning current account deficit and the people’s insatiable demand for gold.