The Reserve Bank of India swung into action today after the rupee depreciated 1.7 per cent in four trading sessions and went close to its all-time low levels in early trade today. In a communication made after market hours, the central bank relaxed norms to encourage foreign currency inflows.
The RBI relaxed the interest rate ceiling on foreign currency non-resident (FCNR) deposits of banks with maturities of one to three years to 200 basis points above the LIBOR or swap rate, from 125 basis points now. On three-five year maturity FCNR deposits, the rate ceiling will be relaxed to 300 basis points above LIBOR. The central bank also allowed banks to freely determine the interest rates on export credit in foreign currency.
Market participants, however, said these measures might help the rupee only marginally, as deposit rates were having a softer bias. Clarification on policy issues like General Anti Avoidance Rules (GAAR) and correction in oil prices will play an important role on the fate of the Indian currency.
The central bank’s announcement came on the back of high volatility in the foreign exchange market that saw the domestic currency weaken to 53.92 in early trade, triggered by comments made by Minister of State for Finance S S Palanimanickam that the country would review the tax treaty with Mauritius.
- Uncertainty over GAAR
- Increasing foreign debt
- Dull exports
- Stubborn crude oil prices
- Global risk-aversion
However, during the last hour of trade, the currency staged a remarkable recovery when state-run lenders started selling dollars on behalf of the central bank. Exporters also helped the rupee gain, as software majors and a heavy engineering firm sold dollars to book profits in anticipation of resistance at the 54 a dollar level.
All that helped the rupee close at 53.48 a dollar, a little weaker than yesterday’s close of 53.41. However, the currency bounced in both directions as it touched an intra-day low of 53.92 in early trade and then rose to 53.44 towards the end of the day, according to Bloomberg data.
While the central bank intervention was seen around $200 million, exporters, including a few large ones, sold around $500 million to take advantage of the weak rupee levels.
Finance Minister Pranab Mukherjee today blamed volatility in global commodity prices for currency depreciation and said the deteriorating balance of payments (BoP) situation in several Asian countries also put stress on currencies.
“In several Asian countries, excepting China, the BoP is under stress, which leads to currency depreciation,” Mukherjee told reporters in Manila.
“There is a high possibility of the rupee falling to all-time low levels if it breaches the current resistance at 53.80. There is a need for clarity from the government in terms of policies like the General Anti Avoidance Rule to strengthen foreign fund inflows,” said Ajay Marwaha, executive vice-president and head of trading at HDFC Bank.
Deutsche Bank pointed out in a report that over 40 per cent of FII investment into Indian equities, which comes to around $100 billion, is channelled through Mauritius, some of which could be jeopardised by future GAAR liabilities.
Meanwhile, dollar demand from Indian companies to make foreign debt repayments and to buy expensive crude oil continued to add pressure on the exchange rate. On the other hand, a slowdown in exports does not augur well for the country and the currency.
On December 15, 2011, the rupee had touched an all-time low of 54.30 against the dollar, following which the RBI introduced a slew of measures along with an aggressive intervention in the foreign exchange market. The central bank sold around $20 billion in the September-February period.
However, little is expected from the central bank this time. “India’s foreign exchange adequacy is at levels last witnessed in financial year 2000-01 and the liquidity deficit remains larger than the target of one per cent of net demand and time liabilities. Hence, the RBI is unlikely to be able to keep supplying substantial amounts of dollars to the markets,” said economists at Standard Chartered Bank in a note.
Also, problems resurfacing in the euro zone may weigh heavily on the Indian currency. Analysts at Edelweiss Securities note that European banks have sizeable exposure to India and would tend to retrench their exposure across emerging markets as risk-aversion rises. “The trend may be at play in April as well,” they said.
“A correction in oil prices and a clarification on GAAR next week may help the rupee. RBI measures announced today may help increase flows marginally,” said Vivek Rajpal, India rates strategist, Nomura.