Rupee erases gains vs US dollar as Moderna head questions vaccine effectiveness on Omicron

NEW DELHI: After opening stronger against the US dollar, the rupee took a hit on Tuesday as reports quoted Moderna’s Chief Executive Officer as saying that existing vaccines may not be as effective against the latest strain of the coronavirus, dubbed Omicron.

Government bonds extended gains as the news fuelled speculation of global central banks prolonging monetary policy accommodation to shield economies from the fresh risk to growth posed by the new strain of the virus.

The partially convertible rupee weakened well past the psychologically significant 75/$1 mark and was last at 75.11 per US dollar. The Indian currency, which had opened at 75.03/$1 as against the previous close of 75.10/$1, touched a day’s low of 75.20 per dollar on Tuesday.

Since the new strain was detected in some African countries and Hong Kong on Friday, the rupee has shed 0.9 per cent against the US , with Monday’s close marking the weakest settlement in six weeks.

Globally, fixed income and currency markets have been roiled since the detection of the new strain with investors rushing to the safety of assets such as the Japanese Yen and US Treasuries and accordingly reducing exposure to riskier emerging market currencies such as the rupee.

Yields on US 10-year US Treasury bonds, which earlier in the month had climbed past the crucial 1.60 per cent mark after the Fed struck a hawkish tone, have tumbled close to 15 basis points in the last couple of days. The 10-year US government bond yield was last at 1.47 per cent.

The bearish outlook on global growth has also led to a flurry of overseas investment outflows from Indian equity markets, accentuating the fall in the rupee.

Benchmark equity indices, which started the day on a strong footing, pared gains after the report quoting Moderna’s head was released.

With the latest developments on the coronavirus casting a shadow on growth prospects worldwide, investors speculated whether the Reserve Bank of India would opt to delay a formal announcement of policy normalization at its statement on December 8th and instead adopt a wait-and-watch approach.

“The earlier view as that a reverse repo hike is definitely on the cards, but now it seems more and more possible that the RBI will maintain status quo,” a dealer with a large foreign bank said on condition of anonymity.

“There is still a lot left to see regarding the spread of Omicron but the biggest factor in support of the RBI doing nothing is the uncertainty element. Because the RBI cannot find itself in a position where it has to cut rates again after hiking. That is why bonds are rallying,” he said.

Yield on the 10-year benchmark 6.10 per cent 2031 bond was last at 6.31 per cent, three basis points lower than previous close. Bond prices and yields move inversely.

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