Indian rupee falls most this year on Jammu and Kashmir

Currency slid after government scraps Article 370 of the constitution granting special status to the troubled state

A woman puts flower petals on the new 100 Indian rupee notes as she prays as part of a ritual during Dhanteras, a Hindu festival associated with Lakshmi, the goddess of wealth, in Ahmedabad, India, November 5, 2018. REUTERS/Amit Dave
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Indian rupee slid the most since December as the government scrapped the special status for the troubled Jammu and Kashmir state, heightening political uncertainty amid a sell-off in the region’s currencies.

The rupee weakened as much as 1.4 per cent before paring the loss to 1.1 per cent at 11.45am in Mumbai. The yield on the benchmark 10-year bond rose five basis points to 6.4 per cent, reversing some of last week’s losses.

India revoked the special status of Jammu and Kashmir, a move that risks deepening the deteriorating security situation in the disputed region at a time when escalating global trade tensions is battering markets across Asia. China’s yuan fell past 7 per dollar for the first time since 2008 amid speculation Beijing was allowing its currency to weaken to counter US President Donald Trump’s latest tariff threat.

“The worries over the political situation in Kashmir and the yuan depreciation are weighing on the currency,” said Paresh Nayar, currency and money markets head at FirstRand in Mumbai.

The government scrapped Article 370 of the Indian constitution, which gave the state of Jammu and Kashmir complete autonomy and freedom to draft its own laws except in the areas of communications, defence, finance and foreign affairs. The government also proposed to split the state into two federal territories.

In the lead up to Monday’s order, prominent political leaders in Indian-administered Kashmir were placed under house arrest and the army deployed thousands of extra troops across the valley in one of the most widespread security crackdowns in recent years. Pakistan Prime Minister Imran Khan warned in a tweet on Sunday that India’s "new aggressive actions" had "the potential to blow up into a regional crisis".

Traders also said that there was likely dollar selling by state-run banks to stem the rupee’s losses.

The rupee had gained for a second successive month in July as investors found India’s debt assets attractive amid a growing pile of negative-yielding debt globally. The currency also benefited from a fiscally prudent budget and the government’s decision to sell debt offshore.

“The market has been short on dollars and we saw positions beginning to flip late Friday,” said Anindya Banerjee, a currency strategist at Kotak Securities. “A break of 70.50 may see 71.50 being the next level.”