MUMBAI: The rupee hit 13-month lows and bonds plunged as markets in the region tumbled on fears about the global economy, raising doubts about whether India can afford to cut interest rates given risks that such a move could trigger foreign outflows.
Benchmark 10-year bonds fell the most in more than 8 months, while the rupee hit a session low of 63.70, its weakest against the dollar since Nov. 13, 2013, when India was in the midst of its worst currency turmoil since a 1991 balance of payment crisis.
Traders cited sporadic dollar selling by the Reserve Bank of India to prevent excessive volatility in the rupee, although most described the interventions as mild.
Trade Secretary Rajeev Kher said he was not too concerned about the rupee's falls to around 63 to the dollar, while a central bank official told Reuters "it is still not an alarming situation".
"I feel that if the rupee falls further down or stays for too long at this point, it should give me a reason to feel a little more concerned," Kher told reporters in a news briefing in Mumbai.
The partially convertible rupee fell to 63.53/54 per dollar, down 0.9 percent from its Monday close of 62.94/95. Over the last two days, the unit has dropped 2 percent, posting its worst two-day losing streak since Sept. 4, 2013.
India is widely seen as sturdier in the face of any sell-off in emerging markets compared with last year, even as data on Monday showed a surge in gold imports again widening the trade deficit.
Efforts to narrow the current account deficit - India's Achilles heel last year - and the election of Prime Minister Narendra Modi have led foreigners to purchase a net $43.4 billion in shares and bonds this year, allowing India to outperform most emerging markets.
"India is certainly less vulnerable to the current crisis as compared to other emerging Asian economies," said Samir Lodha, managing director at QuantArt Market Solutions, citing factors such as easing inflation.
Nonetheless, the volatility in global markets is casting doubt about how soon India can cut interest rates, upending expectations a sharp fall in consumer and wholesale inflation would lead the RBI to ease as early as at its next policy review in February.
The benchmark 10-year bond yield hit a 17-month low on Monday on hopes for rate cuts, but surged 16 basis points on Tuesday to end at the session high of 7.99 percent, its biggest single-day rise since April 2.
Russia sharply increased its benchmark interest rate on Monday, raising concern about the global economy at a time of sliding oil prices and a weakening China economy.
Analysts also worry about the impact on global markets of any rate increases by the U.S. Federal Reserve next year, a prospect that RBI Governor Raghuram Rajan has repeatedly warned about.
A foreign sell-off and the prospect of imported inflation from a weakening rupee could make the RBI cautious, traders warned.
"If the rupee weakness sustains for long, then we could see a delay in rate cuts," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
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