Rupee declines as contagion fears impact risk assets

20 Mar 2023

India’s Rupee fell on Monday as the relief from the UBS takeover of Credit Suisse was fleeting on investor fears over a contagion within the global financial sector.

The Rupee closed at 82.6350 per Dollar, Reuters reports, compared to the prior close of 82.5525. 

Losses in stocks and currencies in Asia worsened as the session advanced, as the focus moved to the impact on a number of Credit Suisse bondholders as a result of the UBS takeover “due to the write-down of additional tier-1 (AT-1) capital debt” the Reuters report adds. 

Meanwhile, shares in India, Indonesia and Singapore declined between 1% and 1.5%. 

“While this (Credit Suisse deal) surely offers a breather to global markets as a black swan scenario is ruled out, it comes at a rather hefty cost for some categories of investors, which is ultimately showing its negative impact on markets,” said ING analysts. 

AT-1 debt accounts for a section of the capital buffers banks are required to hold by regulators for protection during market turmoil. 

This has heightened concerns over the fragile state of US regional banks as central banks around the world continue monetary tightening to curb inflation. 

Indeed, the Fed’s monetary policy meeting this week may prove to be vital. Futures predict close to a 60% chance the Fed will pause hikes on Wednesday, a turnaround from last week when markets priced in a 25-basis point hike. 

The decision over the weekend by other major central banks, as well as the Federal Reserve, to take action to stop the spread of a banking crisis sparked the bets for a pause in the rate hiking cycle, according to traders. 

This, coupled with lower US bond yields, bolstered Rupee premiums, with the one-year yield rising to 2.50% for the first time in five months.