The rupee slumped to an all-time low on Wednesday amid weak macroeconomic fundamentals and global uncertainty. The Reserve Bank of India’s (RBI’s) limited intervention was not enough to lift the rupee, the worst performing Asian currency since March.
The rupee touched all-time low levels in early trade when the RBI sold dollars to arrest the fall but it fell further on the back of strong dollar demand by importers. According to Bloomberg data, the rupee closed at 54.49 a dollar, 1.3 per cent lower than yesterday’s close after having touched a lifetime low of 54.52 a dollar. The previous all time low (intra-day) was 54.30 a dollar attained on December 15. On Wednesday’s closing level is also a lifetime low. In this month alone, the rupee has depreciated 3.33 per cent against the greenback.
The RBI tried to soothe nerves by saying it would take more steps when necessary. “The RBI is aware of the situation. We have taken steps and will take further steps, if necessary,” said RBI Deputy Governor H R Khan. He added the rupee fall was partly because of global factors.
Foreign fund outflows from the equity markets, to the tune of Rs 546 crore, also put pressure on the domestic currency. The Bombay Stock Exchange (BSE) benchmark, Sensex, on Wednesday slumped 1.83 per cent, or 298.16 points, to 16,030.09, its lowest close since January 9.
According to dealers, public sector banks sold dollars to the tune of $500 million in the spot market on behalf of the RBI in early trade. Dealers said the RBI also sold $100 million in the forward market. During the September-March period, the RBI sold a little over $20 billion to arrest the rupee fall.
“Both material and verbal intervention from the central bank was not helpful during the day as a weakening euro continued to weigh,” said a treasury dealer with a domestic consultancy firm.
|CARNAGE ON THE STREET
The Sensex closes at its lowest since January 9;
global commodities see a drastic fall in prices
||16 May, 2012
|> International 1800 Hrs IST
|Brent crude ($/bbl)
|Silver (Rs /kg)
|Standard gold (Rs 10 g)
|> LME 1820 Hrs IST
|*Change over previous close
Compiled by BS Research Bureau Source: Bloomberg
Reflecting the global risk-off mode, the dollar index against six major currencies was trading close to a two-month high of 81.35 levels, up 0.7 per cent. “The dollar gained on account of global risk-aversion, as concerns over Greek sustainability forced investors to move towards safe haven currencies,” said India Forex Advisors in a note.
“Apart from weak domestic economic fundamentals, the global conditions are not strong either. The downside to the rupee from here essentially depends on the strength of the measures taken by the RBI and the government. Clearly, only intervention in the foreign exchange market is not enough to arrest the fall,” said Priyanka Kishore, FX strategist, Standard Chartered Bank.
Market participants expect the RBI to announce a direct dollar window for oil companies, which may provide a breather to the rupee. “But it can still trade towards 55/$ if global risk-aversion persists and additional measures to encourage capital inflows are not announced,” Kishore said. The RBI had opened such a dollar window during the global financial crisis of 2008.
The software industry, among the largest exporters, is set to gain from the weakening rupee. “For the IT industry, every one per cent movement (rupee depreciation) will have an impact of 40-50 bps on our margins,” said V Balakrishnan, chief financial officer, Infosys. He, however, said the rupee would be range-bound around the 53-54 a dollar levels. “But, I think the RBI is trying to predict it at a certain level and within a range,” he said.
According to Shikha Sharma, managing director and CEO of Axis Bank, though a weaker rupee will make exports more competitive, yet too much weakness will adversely impact consumer confidence and increase import costs.
“You have to let the rupee slide to its natural level, but you don't want too much of a fall. It is not good for anybody,” Sharma said.
Meanwhile, in a scathing report, Citi warned the rupee could hit 60 to a dollar and added India's four deficits —current account, fiscal, governance and liquidity — were mainly of its own doing, television channels reported. Citi said investors agreed India’s growth would remain shackled at a modest six-seven per cent and added, "The unfortunate part is that the problems appear self-inflicted, with India now seen to be specialising in scoring self goals."