Concern of rupee breaching the 50-mark grows

It is a half century many Indians wouldn't like to witness. However, as the rupee continued its slide against the greenback, bankers and economists believe it is only a matter of time before the local unit breaches the 50-mark. on Thursday, the currency plunged the most in more than 15 years.

“It will not be surprising if the rupee hits the 50-mark in about a week's time. However, it would be momentary, as the Reserve Bank of India (RBI) will not let it go beyond a set range,” said Madan Sabnavis, chief economist, CARE.

The rupee plunged to a 28-month low in on Thursday's trade, falling 2.5 per cent to close at 49.58 to the dollar, according to Bloomberg data. The currency has lost 9.8 per cent this quarter, and has performed the worst among the 10 most traded Asian currencies.

“It is very difficult to predict where the rupee would head, given the volatility in the market. But the way things are right now, and if RBI does not intervene, it is very likely the rupee will breach the 50-mark. It may then come back to 48-49 level and stabilise, but it is difficult to forecast anything right now,” said V K Khanna, general manager (treasury and international banking), Union Bank of India.

For some, the pace of the rupee's depreciation has been so severe that they believe the local unit may breach the 50-mark as early as tomorrow.

“I have no choice, but to reluctantly agree that the rupee will cross the 50-mark because of the way it has moved on Thursday. If tonight, there are bad news flows, then nothing will stop the rupee from trading at 50 tomorrow,” said a senior official in charge of the global markets division of a foreign bank.

Industry sources said RBI appeared to have intervened in the foreign exchange market to limit the fall at 49.15-49.20 levels. “There is a need for consistent and decisive intervention. Intervention of this nature does not help, it only encourages speculation,” said a dealer with a Mumbai-based bank, requesting anonymity.

Industry experts said the elevated global risk aversion and weakening trade fundamentals were responsible for the weakness in the currency.

“If the rupee continues to weaken further, it would pressurise inflation further, through the higher cost of imported goods and commodities. Rupee depreciation could also stress some corporate balance sheets that have un-hedged dollar liabilities,” said Sajjid Chinoy, economist at JP Morgan, India.