Rupee at 57 a dollar is new normal

Street sees the rupee hitting a new all-time low soon

The weakening of the rupee against the dollar has led to a new normal for the Street, seen at 57. It is also expected that the rupee is headed this month towards an all-time low. According to currency dealers, though the Reserve Bank of India (RBI) is intervening, its moves are not very useful as overall sentiments are weak.

“Since the market has moved so much in two days, we might see some strengthening close to 56 a dollar. As 60 a dollar is very much on the cards now, the market has accepted the fact that 57 is the normal level,” said Abhishek Goenka, founder and CEO, India Forex Advisors. The rupee opened at 56.73 on Friday, and during intra-day trades it touched a high of 56.69 and a low of 57.13 before closing at 57.07. It had closed at 56.85 on Thursday. June 27 was the last time when the rupee had closed at a level breaching the 57 mark at 57.14. The currency has weakened 5.5 per cent against the dollar since the beginning of May. The rupee is now not very far from its all-time low of 57.33 seen on June 22 last year.

According to currency dealers, RBI’s interventions are falling flat. “RBI has limitations in defending the rupee when system liquidity is in deficit mode and there are not enough dollars in the reserves. RBI continues to highlight inflation as risk to growth, denting the hope of a further rate cut in the near future,” said J Moses Harding, head,economic and market research, IndusInd Bank. The weakening of the rupee against the dollar is characterised by factors like heavy dollar demand from oil importers, foreign institutional investors (FIIs) pulling out of domestic markets and repayments towards external commercial borrowings (ECBs). FIIs pulled out $ 371.66 million from domestic markets on Friday compared with sell-offs worth $ 233.21 million on Thursday.

However, a few experts expect the rupee’s headwinds diminishing considerably. According to Taimur Baig and Kaushik Das of Deutsche Bank, this will be due to inflation, which has been declining rapidly, pushing up real interest rates and increasing the attractiveness of investing in rupee assets. Besides, current account is likely to correct substantially as the cost of importing gold and oil is declining, weak growth and policy measures are lowering import demand, and rising real interest rate is reducing the need to hedge against inflation through capital flight.

Baig and Das are of the view that inflows outlook is broadly positive with a number of disinvestment programmes in the pipeline, and a rate cut cycle (the only one in a major emerging market economy) likely to keep fixed income investors interested. Global risk aversion and associated sell-off is likely to abate, as they believe the ongoing concern about the end of quantitative easing has already caused the markets to overshoot.