Rupee Dives As India Raises Base Interest Rate Whilst Germany Holds General Election This Weekend

Sep 20 • Mind The Gap • 2446 Views • Comments Off on Rupee Dives As India Raises Base Interest Rate Whilst Germany Holds General Election This Weekend

Readers will have been aware that over recent months the rupee has come under intense pressure on the foreign exchange markets falling to record lows versus the dollar, whilst the dollar was also losing value versus its major currency peers. The Reserve Bank of India surprised the markets in the overnight/early morning session by announcing a quarter-point rise in India’s headline interest rate, from 7.25% to 7.5%. The RBI also announced it will unwind some of the “exceptional measures” put in place in order to support the Indian Rupee, after witnessing the rupee slumping to record lows versus the US dollar this summer.

‘Bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately. What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence. Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency.”

A rate hike normally pushes currency values up, but the rupee slumped as the news hit the wires, traders realising that the RBI was cutting some of the exceptional measures introduced to support its currency. The rupee fell from 61.7 to the dollar to as low as 62.55. Equities also fell on the Indian stock market, the Sensex slumping over 2.1% today.

German general election

Germans head to the polls on Sunday to vote in their general election which will determine how Europe’s largest country is governed for the next four years. Angela Merkel’s CDU-CSU party will win the most votes. But there’s uncertainty over whether her coalition with the Free Democrats can be repeated, or whether we’ll see a grand coalition with other left-leaning rivals.

The latest survey suggests Merkel’s coalition will win enough votes to take power again putting CDU at 40%, the Social Democrats at 27%, FDP at 5.5%, Linke at 8.5%, the Greens at 9%, and the eurosceptic Alternative for Deutscheland at 4%. A party needs 5% of votes to get into the German parliament, the Bundestag. If AfD pass the 5% mark, as some polls have suggest, German politics will be dramatically shaken up.

Market snapshot at 10:00 am UK time

The Nikkei index closed down 0.16% in the overnight session, the Hang Seng closed up 1.67% and the CSI closed up 0.21%. The ASX closed down 0.36%. European markets are enduring mixed fortunes early in the European trading session; STOXX down 0.06%, FTSE down 0.07%, CAC down 0.12% and DAX down 0.07%. Looking towards the USA open the DJIA equity index future is currently flat as is the SPX with the NASDAQ up marginally.

ICE WTI oil is up 0.02% at $105.88 per barrel, NYMEX natural is down 0.51% at $3.70 per therm. COMEX gold is down 1.07% at $1354.60 per ounce with silver on COMEX down 2.69% at $22.66 per ounce.

Forex focus

The euro was little changed at $1.3533 early in the London session after reaching $1.3569 yesterday, the highest level seen since Feb 7th. It slipped 0.2 percent to 134.35 yen, after rising to 134.95 yesterday, the most since November 2009. The euro is headed for its biggest weekly gain in over two months versus the dollar before reports that economists said will show consumer confidence improved in the 17-nation currency bloc and manufacturing expanded.

New Zealand’s currency headed for its third weekly gain, extending its advance versus the U.S. dollar after the Reserve Bank said on Sept 12th that interest-rate increases may be required next year from the all-time low of 2.5 percent because inflation is picking up. The kiwi added 0.2 percent to 83.93 U.S cents after reaching 84.36 yesterday, the strongest level seen since May 9th. It has advanced 3.2 percent since Sept 13th. The Australian dollar rose 0.1 percent to 94.51 U.S. cents, extending its gain this week to 2.2 percent.

Sterling rose 0.2 percent to $1.6064 early in the London session after climbing to $1.6163 on Sept 18th, the highest level seen since Jan 11th. It’s gained 1.2 percent this week. The U.K. currency appreciated 0.2 percent to 84.25 pence per euro after reaching 83.53 pence on Sept 18th, the highest level seen since Jan 17th.

UK’s PSNB falls

In 2012/13, the UK public sector net borrowing excluding temporary effects of financial interventions and also excluding the effects of the transfer of the Royal Mail Pension Plan and the transfers from the Bank of England Asset Purchase Facility Fund was £115.7 billion. This was £2.8 billion lower than in 2011/12.

The benchmark 10-year gilt yield was at 2.90 percent, having fallen one basis point, or 0.01 percentage point, this week. The price of the 2.25 percent bond maturing in September 2023 was 94.415.