Strong dollar demand from oil importers pushed the rupee to fresh lows for the fifth day in succession on Tuesday, as the Reserve Bank of India (RBI) refrained from intervening in the foreign exchange market.
The rupee fell to an all-time low of 55.47 a dollar, before closing at 55.40, compared to its Monday close of 55.04. The fall was accentuated after rating agency Fitch downgraded Japan, which further weakened the global sentiment.
The weakening of the Indian currency continued on Tuesday even after the RBI announced measures to target arbitrage and speculation in the currency futures markets yesterday, with dealers saying that market segment was too small to have a big impact.
“Most banks were short in the OTC (over-the-counter) market and going long in futures as there was an arbitrage opportunity there. Now that the RBI has asked them to unwind the positions, banks will need to buy dollars from the spot market, thereby leaving a temporary negative impact on the rupee,” a senior official from a public sector bank said.
The government, however, assured it was taking a series of steps to stem the rupee depreciation. “However, managing the rupee is market-related. There is a lot of volatility... As and when the RBI will consider necessary, they will intervene. It depends on market forces and market forces are uncertain,” Finance Minister Pranab Mukherjee told reporters in New Delhi.
Mukherjee also blamed the euro zone debt crisis for the rupee’s fall, which has impacted the Indian economy through a deceleration in exports, widening of trade and current account deficits and a decline in capital flows.
Despite the rupee having fallen 14 per cent after its peak of 2012 on February 3, the RBI has adopted a guarded approach in using its foreign exchange reserves to arrest the fall.
“It is likely that in a country with a high current account deficit, the currency would depreciate in an uncertain global environment. It is difficult for the central bank to completely reverse the trend. So, the RBI is attempting only to slow the pace of depreciation,” said Samiran Chakr-aborty, chief economist and head of research, Standard Chartered Bank.
“The RBI’s forex reserves are just adequate to intervene in a limited way. With uncertainty over the euro zone looming, the RBI would possibly not like to exhaust all its ammunition in a hurry,” he added.
The measure to increase dollar flows from exporters' foreign exchange accounts announced last week is yet to have a significant impact. The RBI had asked exporters to cut dollar holdings 50 per cent within 15 days. The deadline will expire tomorrow.
“Dollar inflows from the accounts after netting off will be only about $1 billion. Liquidity will dry up in the futures market after a week and then we may see the real impact of cutting speculation. The rupee may keep falling till the government announces structural measures,” said a foreign exchange dealer from a consultancy firm.