OUR BUREAU Mumbai, June 17

Currency and bond marketsturned intensely volatile follow-ing US Federal Reserve ChairmanJerome Powell’s statement onWednesday that a committeewill begin considering unwind-ing of the ongoing quantitativeeasing programme. Adding tothe nervousness of the markets,the Fed indicated the possibilityof 50 basis points hike by 2023,which is interpreted as beinghawkish.

The rupee weakened by about76 paise on Thursday to cross the74-to-a-dollar mark. After almostseven weeks, the Indian counterbroke through the 74 mark toclose at 74.08/dollar against theprevious close of 73.32.

Yields on the 10-year bondspiked , but closed down 3 basispoints at 6.02 per cent. Mostother bond yields rose 3-4 basispoints, tracking the US bench-mark bond yield that jumped 7.5basis points.

“The Fed’s ‘U’ turn resulted inrisk-off�� trade across the globe.Treasuries and the dollar were indemand again and emergingmarkets and currencies took ahit,” said Amit Pabari, ManagingDirector, CR Forex.

The implication of the Fed ratehikes, which can weaken the do-mestic currency, and the harden-ing crude oil prices is that infl��a-

tion could increase in India. Thecountry imports almost 80 percent of its crude oil requirement.

Another impact of the pos-sible rise in US interest rates foremerging market economiessuch as India could be that for-eign portfolio investors (FPIs)may prefer to invest in the USdue to relatively higher risk-ad-justed returns.

“In the last couple of months,FPI infl��ows, especially into initialpublic off��erings, was supportingthe rupee. But going forward,this may not be the case. FPIsmay start pulling out gradually.Once the Fed starts hiking rates,risk-adjusted rate of return fromthe Indian market may nolonger be lucrative when com-

pared with the US,” said the treas-ury head of a private sector bank.

Madhavi Arora, Lead Econom-ist, Emkay Global Financial Ser-vices, said, “The rupee leads theemerging markets Asia forexpack in losses today as the mar-kets digest the hawkish FOMCwith the median dot chart nowindicating two rate hikes in 2023.This has helped push the broaddollar up another 0.7 per centtoday (currently at 91.65), imply-ing pressure on emerging mar-ket currencies, led by high betaones.”

Pabari said that movingahead, it would be interesting towatch how Fed communicatesabout tapering as their next step— ‘Early rate hike’ — is already get-ting discounted in the market.“But one thing is sure that fl��ightof capital will happen fromemerging markets to US treasur-ies. Not only the RBI, with thefi��fth largest reserves in theworld, will compromise butother EMs will also need to usetheir reserves.”

Top US centralbanker talks ofunwinding the QEprogramme, raisinginterest rates

Rupee crashes, bond yieldsspike as Fed turns hawkish