No respite seen for rupee

After a 2.5 per cent loss against the greenback last week, its worst fall in eight weeks, the rupee seems headed for its all-time low against the dollar.

Experts cite two reasons for this prognosis: a solution to the sovereign debt crisis in the euro zone looks remote and the Reserve Bank of India (RBI) has hinted at a status quo in its foreign exchange management policy.

The rupee had hit its all-time low of 51.97 in March 2009. It has been Asia’s worst performing currency in 2011 so far and has weakened almost 15 per cent against the dollar.

“Both domestic and external factors are signalling downside risk to the rupee. It could test all-time lows and probably remain in the 51.45-52.25 a dollar range next week. The rupee-dollar base has shifted upwards from 39 in 2008 to 44 in July 2011 and now 51. The question whether there would be a further upward shift is very difficult to answer,” said Moses Harding, head-economic & market research, IndusInd Bank.

Others are more cautious. “Predicting a near-term level for the rupee is hazardous, given the current situation in Europe and the negative sentiment surrounding the currency. So, the rupee may well stay weak in the near term,” said Sajjid Chinoy, India economist, JPMorgan.

According to dealers and analysts, the rupee is headed for the 52 a dollar mark and the central bank may not intervene in a big way. In any case, since the depreciation of the rupee is driven more by global factors, an RBI intervention may not be of much help, according to dealers.

Last week, RBI deputy governor Subir Gokarn indicated the central bank would use its foreign exchange reserves judiciously.

The central bank had sold $845 million in September, having followed a hands-off approach for nine months, RBI data showed.

“The worry is there is no quick solution to fix rupee depreciation now,” Harding said.

The rupee’s decline is based on the expectation dollar demand will remain strong due to worries over the euro zone debt crisis. The rise of the euro on Friday is seen as temporary as the initial euphoria over the European Central Bank’s intervention in the Spanish and Italian sovereign bond markets is not expected to last.

Some analysts, however, said the pessimism over the rupee may be only in the short term and the currency may recover to settle around the 50 level.

“At this point, exporters should sell their one-three month receivables and importers should wait for 50 levels. Excessive moves can get reversed even if there is the slightest reduction in dollar demand. Markets are in an oversold dollar position and the rupee should come back to 49-50 levels later,” Harding said.

Chinoy agrees there is hope in the long run. “Over the next six-nine months, as the trade deficit narrows and if the global stress abates, the mean reversion could be quite sharp,” he said.