RBI acts, but rupee falls sharpest in 15 years

Investors dumped high yielding assets and moved towards the dollar after the US Federal Reserve expressed concerns over the US economy. This led the rupee to its sharpest fall in a single day in 15 years, according to Bloomberg data.

A half-hearted attempt by the Reserve Bank of India was of no help in arresting the slide. The Indian currency closed at a 28-month low of 49.58 against the dollar on Thursday, down 2.57 per cent from its previous close. The second biggest fall was on November 12, 2008 when the rupee depreciated 2.44 per cent against the dollar in a single day. The Dollar Index, which tracks the greenback against six major trading partners, rose for a second day.

The Indian currency has lost 9.8 per cent this quarter, the worst performance among the 10 most-traded Asian currencies. The steep fall in the rupee will add pressure on inflation as India imports more than 80 per cent of its oil requirements.
 

MAJOR CURRENCIES AGAINST THE US DOLLAR
	22-Sep	% chg*
South Korean won	1,179.85	-2.61
Indian rupee	49.58	-2.57
British pound	0.65	-0.96
Euro	0.74	-0.92
Swiss franc	0.91	-0.9
Chinese renminbi	6.39	-0.09
Indonesian rupiah	9,024.00	-0.07
Brazilian real	1.88	0.03
Japanese yen	76.33	0.17
* Over previous close          Source: Bloomberg  Compiled by BS Research Bureau

The RBI intervened to arrest the slide once the rupee breached 49 but the action did not yield the desired results. According to a foreign exchange dealer, the effect of the RBI intervention at about the 49.17 level was short-lived. “The rupee did move up to around 48.90 for a while, but later it was one-way movement: down. In the absence of positive news, the rupee could touch the 50 mark against the dollar tomorrow itself and breach the all-time low of Rs 52.17 in March 2009 within the next three months,” he said.

Dealers said two or three large public sector banks were active on behalf of the central bank in the afternoon. This was the second occasion in a week that the central bank intervened to stem the rupee fall.

Apart from the strengthening of the dollar in the global market, there is very little dollar supply in the market as most exporters have covered themselves in the Rs 45-46 range. “So not much hard currency is coming in the market for them at these levels. A speculative element is also partly playing a role as some players are shorting,” said a dealer with another public sector bank. According to analysts, the RBI should step up its intervention as the downside risk to inflation rises with depreciation, and to curb excess volatility.

“The case for RBI intervention is strong, in the face of imported inflation and FX volatility risks. However, the central bank is yet to signal that FX-related concerns have increased substantially. Intervention remains sporadic and muted,” said Priyanka Kishore, FX strategist, Standard Chartered Bank.

Market participants said the RBI’s greater tolerance may be due to liquidity concerns as the banking system liquidity was already tight and an intervention may strain it to undesirable levels. “Recent moves are likely to test the RBI’s tolerance and tilt the scale in favour of greater intervention,” Kishore said.

The central bank has always maintained it does not target any particular level of the rupee and its intervention is aimed at curbing excessive volatility in the foreign exchange market.