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Investors may prefer US bonds as currency volatility continues: Analysts

According to currency experts, most emerging markets have seen their currency dropping sharply in the past week due to the dollar appreciating in the international market.

twitter-logo Dipak Mondal        Last Updated: August 21, 2013  | 20:46 IST

India's currency woes continue unabated. The rupee dropped to its all-time low of 64.54 against the US dollar on Wednesday.

According to currency traders, the Reserve Bank of India (RBI) intervened on Wednesday after rupee breached 64.5 and as a result the rupee recovered to 63.89. The rupee closed on Wednesday at 64.11 a dollar.

It has dropped 8.5 per cent against the dollar in the past one month and over 17 per cent in the past three months.

Analyst do not expect the slide to end either. Deutsche Bank expects the Indian currency to drop to 70 to a dollar in a month.

"We continue to believe that fundamentally the rupee is undervalued and has overshot its equilibrium level substantially, but as numerous episodes of past currency crises have amply demonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time," Deutsche Bank said in the report.

In the past five to six days, the slide has been primarily due to the US Federal Reserve's deadline for tapering off its Quantitative Easing (QE) coming closer. The US Fed has said that it would slow down its bond buying process from September.

According to currency experts, most emerging markets have seen their currency dropping sharply in the past week due to the dollar appreciating in the international market. The worst hit countries are India, Indonesia, Russia and Brazil.

The rupee's fall has been aggravated by the country's high current account deficit (CAD), due to which RBI has not been able to check dollar demand.

The central bank's move to tinker with interest rates in order to curb the rupee's fall has proved counterproductive. It sent wrong signals to foreign institutional investors (FIIs), who pulled out from Indian stock markets fearing slow growth due to rise in interest rates.

"India had financed it current account deficit by inflows from FIIs. But the RBI move to curb liquidity in the market triggered FII outflow, worsening the situation," says Anindya Banerjee, currency analyst, at Kotak Securities.

The broader market on Wednesday reacted sharply to rupee slide as the Nifty index of the National Stock Exchange shed another 98 points, or two per cent, to close at 5,302 on Wednesday. The Bombay Stock Exchange (BSE) Sensex on Wednesday closed 340 points below its previous close 18,246.

Aviral Gupta, founder and fund Manager, Mynte Advisors, says that given the currency volatility in emerging markets, investors would prefer investing in the US bond despite emerging markets offering much better yields.

The 10-year US bond yields are trading around 3 per cent, while in India it is close to 8.5 per cent.

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