| FII flows hold key to rupee | |
| BS Reporter / Mumbai January 1, 2009, 22:03 IST | |
The currency fell the most in 17 years, losing 24 per cent against the dollar.
The rupee saw the biggest annual fall since 1991, losing 23.75 per cent against the US dollar this year as foreign institutional investors (FIIs) pulled out of emerging markets such as India and the greenback appreciated against most Asian currencies.
The outlook is mixed with treasury officials predicting more volatility in the next months before seeing the rupee strengthen towards the end of 2009.
“There will be a great deal of volatility. The rupee will face much pressure in the short-term but it should display a tendency to strengthen around August-September,” said Sridhar RVS, senior vice-president at Axis Bank.
“The dollar is weakening against the Euro and the pound. But that is not the case with the rupee so far, because capital flows are not good. It should appreciate if there is not too much pressure from outflows,” added Punjab National Bank Chief General Manager Arun Kaul.
Treasury executives at SBI too expect the rupee to appreciate but capital flows hold the key. Sridhar expects FII inflows to revise around June, with higher foreign direct investment also expected to prop up the rupee amid expectation that the global economic situation will improve in in the second half of 2009.
Kaul said capital flows will be the determining factor since FII investment saw the rupee close 2007 at 39.41 against the US dollar. Overseas investors bought a record $17.2 billion of Indian shares in 2007, helping the rupee gain 12.3 per cent, the biggest annual gain since 1974. It touched 39.19 against the dollar on November 7 last year, the highest in nearly a decade.
In contrast, this year, with FIIs pulling out nearly $13.5 billion from the Indian stock markets, the rupee kept depreciating. On December 2, it hit a new a lifetime low of 50.62 against the dollar. Kaul said RBI will strongly defend the rupee from crossing the 50 mark.
On Wednesday, the rupee closed at 48.775 against the dollar, as against 48.485 yesterday, according to Bloomberg data.
Apart from FIIs selling equity post the Lehman crisis to meet the commitment in home countries, the steep rise in commodity and crude oil prices intensified the demand for the greenback in the Indian markets resulting in more dollar purchase to meet raw material requirements.
The moves prompted the Reserve Bank of India to step in through sale of dollars and initiate special measures like dealing directly with public sector oil companies to check steeper depreciation.
The Reserve Bank of India sold a record $20.63 billion foreign currency during October to check steep depreciation of the rupee. With net sales estimated at $18.67 billion during the month, the cumulative sales of foreign currency between April and October 2008 was of the order of $28.32 billion, according to latest data released by RBI.
The extent of dollar sales and revaluation of the the currency basket can be gauged from the fact that India’s foreign-exchange reserves have declined by $62.2 billion from an all-time high of $316.2 billion reached in May.
In the currency futures market, traders expect the rupee to hover around the 49 mark against the dollar in December 2009.
The non-deliverable forward contracts showed traders increased bets for further weakness in the rupee. Offshore contracts indicate traders are betting the rupee will weaken more than 5 percent to 51.38 per dollar in a year, Bloomberg data showed.
Forwards are agreements in which assets are bought and sold at current prices for future delivery. Indian rupee forwards traded overseas are non-deliverable, meaning they are settled in dollars rather than the local currency.
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