The Reserve Bank of India (RBI) on Tuesday swung into action to save the battered rupee after it crossed the 54-a-dollar mark in early trade.
The RBI action helped the currency appreciate 43 paisa but the gains were eroded later in the day on robust dollar demand from importers. The RBI’s support came as the rupee threatened to touch a record low of 54.30, earlier hit on December 15, 2011.
According to Bloomberg data, the rupee opened at 54.05 a dollar, which prompted public sector banks to sell dollars on behalf of the central bank. According to dealers, banks may have sold $500 million in the spot market.
On Monday, the rupee had closed at 53.96 against the greenback, registering a fresh all-time closing low. On Tuesday, it closed at 53.80 a dollar, 16 paisa or 0.3 per cent up from the previous close.
“Usually, trade volumes are less in the morning. This helped the central bank pull the currency below 54 levels with this amount of intervention, which was not that large,” said a forex dealer with a consultancy firm. The dealer added dollar flows were expected to come later in the week, which may keep the rupee from crossing 54 levels. Dealers said during November-December, when the rupee was fast depreciating against the greenback, the central bank may have sold double the amount as on Tuesday’s intervention. During the September-March period, the RBI sold a little over $20 billion in the spot market, data show.
To partially offset the impact on rupee liquidity, the central bank is conducting open market operations to buy bonds. On Monday, the RBI said it would buy up to Rs 12,000 crore in debt on Friday, its second such action in as many weeks. According to the Bombay Stock Exchange, there were foreign fund outflows of Rs 184 crore from the domestic equity markets today.
A worsening global environment amid the sovereign debt crisis in the euro zone and weak macroeconomic fundamentals domestically — indicated by the twin deficits, fiscal and current account — have taken a heavy toll on the rupee. The currency was weakened 20 per cent against the dollar in the past year. Since the beginning of the month, it has depreciated two per cent.
Abhishek Goenka, MD & CEO of India Forex Advisors, said the RBI intervention may not be enough to help the rupee in case the global situation worsened.
Market participants expect more administrative measures from the central bank to support the rupee, as foreign exchange reserves have been dwindling and can now pay for just six months of imports, limiting the RBI's ammunition to defend the rupee.
Among the steps the central bank can announce is a special dollar window for oil companies. That would reduce volatility in the rupee by enabling oil companies to directly source a large part of their dollar requirement, instead of buying large chunks from the market.