Dollar inflows from exporters' FX accounts to support rupee

Having fallen to fresh lows thrice last week, the rupee is expected to get some respite, with dollar inflows from Exchange Earners Foreign Currency (EEFC) accounts and hopes that the central bank would take further steps to arrest the fall.

On Friday, the rupee fell to an all-time intra-day low of 54.91 a dollar before it closed at 54.49 against the greenback. The currency registered a depreciation of 1.5 per cent over the week.

In a circular dated May 10, the Reserve Bank of India (RBI) had given a fortnight for EEFC account holders to convert half of their dollar balances into rupees. “We may see flows of up to $2.5 billion from these accounts, which will help the rupee stabilise for some time,” said a foreign exchange dealer with a public sector bank.

Also, measures such as meeting the dollar demand of oil marketing companies directly and curbing speculative trading are expected from the central bank. The RBI, which does not target any exchange rate, has been selling dollars in the spot foreign exchange market on a daily basis to cut volatility. The central bank has sold $20 billion in the spot market since September. However, dollar strengthening on account of a global risk-off mode is adding to the rupee’s woes.

“Rupee weakness is driven by a strong dollar against global currencies and it would need unwinding of dollar strength to provide relief to the rupee. The RBI’s actions could only limit excessive traction between the dollar index and the dollar-rupee exchange rate,” said Moses Harding, head, economic & market research, IndusInd Bank. The dollar index against six major currencies rose to 81 levels last week.

“Now, the immediate support to watch in the dollar index is at 80.50, which could drive the rupee to 54.10. A further extension into the recent low of 79.50 would extend rupee gains to 53.50,” Harding added.

The rupee has been the worst performing currency in Asia since the start of this financial year. More pain may be in store as fresh triggers in the euro zone would add to the currency’s fundamental weakness. Analysts at Barclays expect the rupee to underperform the wider region as broad-based risk-aversion related to the euro zone exacerbates domestic concerns.

“Markets hold long-standing concerns about the country’s fiscal and currency account deficits. These fundamental issues are compounded by policy U-turns and uncertainty over the timing of plans to introduce a general anti-avoidance rule,” Barclays pointed out in a report.