Rupee faces worst single-day loss since February amid growing border conflict

Mumbai: The rupee on Thursday logged its worst single-day loss since February 2023, its pace of retreat accelerating toward the late afternoon, over mounting concerns the border conflict with Pakistan could linger and engulf a wider geography than anticipated earlier.

The rupee lost more than a percentage point - equivalent to 90 paise - through a single trading session to end at 85.71 per dollar Thursday, LSEG Data showed. It had lost about 40 paise Wednesday after Operation Sindoor struck deep at the heart of the Pakistan-sponsored terror establishments to avenge the deaths of innocent tourists in J&K two weeks ago.

The rupee's trading amplitude mirrored the volatility in other financial assets. It traded in the range of 84.52/$1 to 85.79/$1.

"Dollar demand spiked after about 2pm and there was a lot of short covering seen from traders. Oil companies were also buying and the dollar index also saw an uptick, which acted as headwinds for the rupee," said Dilip Parmar, currency analyst, HDFC Securities.

Agencies

The Reserve Bank of India (RBI) likely intervened lightly, but even the central bank's support wasn't sufficient to shield the local unit.

The weakening of the rupee past 85.50 levels posed a good opportunity for exporters to hedge, traders said.

"Many exporters booked their forwards today," said Ritesh Bhansali, deputy CEO, Mecklai Financial Services.

Dollar-rupee forward premiums also jumped with the one-year implied yield rising 16 basis points to a near one-month high of 2.34%, according to LSEG data. Geopolitical uncertainty could weigh on the rupee, pushing it to levels of 86.50/$1 to 87, traders said.

YIELDS INCH UP
Yields on the 10-year benchmark government security closed at 6.39%, four basis points higher than the previous close. The bond traded in the yield range of 6.31% to 6.40% on Thursday, CCIL data showed. Bond yields started hardening around 2 pm, too, dealers said. They expect yields to rise 3 to 5 basis points if the uncertainties continue.

“When the markets opened today, they were calm in the first few hours because retaliation was measured. But looking at what we are seeing from Pakistan, yields went up sharply in the second half of the session,” said a senior trader from an insurance company. Some traders are, however, seeing this as a buying opportunity, as prices have reduced, with the new 10 year — the 6.33% GS 2025 — paper even trading at a discounted price.

“We are likely to see more of such reactions, and prices will likely fall further. But I do not see this escalation going on for a long time,” said Mataprasad Pandey, vice president, Arete Capital Services. “Hence, this presents a good buying opportunity, as when yields soften, there will be good profits.”