On one side, the US 10 year bond yield is inching up higher day by day on the confirmation by the US Federal Reserve on tapering the quantitative easing (QE). While on the other hand, the Indian Federal bond yield is trading lower at 7.2 per cent and is expected to lower down further as there is increasing speculation over RBI cutting the interest rates .According to analysts, foreign investors have been heavy sellers in recent weeks of Indian debt, which is worrisome for a country which depends heavily on foreign flows to finance its current account deficit and support its markets.
Here are some reasons for it :
Dollar strength: The dollar index has been rising on signs of growing economic momentum and talk of an early end to the Fed's stimulus effort. The dollar is high across the board including the rupee.
Widening trade deficit: Rising deficit is bad for India as it exposes the economy to the risk of sudden stop and reversal of capital flows. The slowdown in the Indian economy has made the current situation even more volatile because the government is unable to generate heavy capital inflow. India's current account deficit was equivalent to a record 6.7 per cent of gross domestic product in December.
Weakness in domestic equities: Foreign institutional investors have been selling index futures in the last week. This is a hedging move as FIIs expect stocks (cash segment) to fall in the near term. FIIs have been a key support for markets (and the rupee) after buying over $15.38 billion (Rs. 90,000 crore) worth of shares this year.
Rising import bill: Oil and gold imports account for 35 per cent and 11 per cent of India's trade bill respectively. There has been continuous demand for the greenback from oil importers, the biggest buyers of dollars in the domestic currency market, pushing the rupee lower.
Weak economic fundamentals: The UPA government is unlikely to deliver far reaching reforms to generate heavy capital inflows
Well, in a candid sense, gaving a currency at an all-time low is not a great advertisement for the government's management and specially for economy