Rupee breaches 61 but recovers after central bank steps in

RBI meets oil firms to consider dollar sale window; outlook remains bearish

The rupee hit an all-time low in early trade on Monday but recovered after the central bank intervened.

The decline was attributed to the dollar gaining against major currencies after US non-farm payroll data on Friday showed companies hired more people than what economists had forecast. This added to the worry that there was a high chance of the Federal Reserve reducing its quantitative easing programme.

The rupee touched an all-time low of 61.22 against the dollar in the morning. It later rose on the back of the Reserve Bank of India (RBI) selling dollars, which helped the currency end at 60.62, against the close of 60.24 on Friday. The US dollar index was trading at a three-year high and the euro was near $1.2850, adding to the domestic currency’s woes. (CURRENCY PANGS)

“On the back of encouraging data of US non-farm payroll last week, the rupee weakened as the Street is concerned that the US Fed will begin cutting its monetary stimulus, known as the third round of quantitative easing (QE3), as early as September,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

RBI called a meeting with oil marketing companies (OMCs) on Monday to explore the possibility of dollar sales to these companies directly. The central bank and the refiners are also exploring the possibility of mandating a single state-run bank to sell dollars to the companies, eliminating bids that fuel speculation in the rupee.

In another decision, the central bank eased rules for non-bank asset finance companies to raise debt overseas by allowing the lenders to raise such funds through the automatic route as against the approval route earlier, in a step aimed at improving dollar supply amid a weakening rupee.

Non-bank asset finance companies can raise offshore debt up to $200 million in a financial year to finance import of infrastructure equipment.

The rupee has fallen around 13 per cent against the dollar since May, the worst such slide in Asia. Apart from global factors, the high current account deficit (CAD) is also hurting the currency. The CAD hit a record high of 4.8 per cent of gross domestic product (GDP) in 2012-13, much above the central bank’s comfort zone of 2.5 per cent. Spiralling crude oil prices, also due to political tensions in Egypt, would worsen the CAD.

The BSE Sensex fell 171 points, or close to one per cent, led by lenders such as ICICI Bank, as the rupee’s decline sparked fear of continued foreign fund outflow and dashed hope of a rate cut at the Reserve Bank of India’s monetary policy review in end-July. Financial sector stocks were the worst hit. Housing Development Finance Corp fell 3.1 per cent and ICICI Bank 2.2 per cent, as rate cut hopes disappeared. Among other blue-chip stocks, Reliance Industries fell 1.5 per cent and Oil and Natural Gas Corporation ended 3.9 per cent lower.

The outlook on the rupee is still bearish, as market participants do not rule out the currency touching 62 to a dollar. “We see a range of 59-62 a dollar in the next one month,” said Brijen Puri, executive director and head of markets, JPMorgan. “We might see a short-term retracement, based on a correction in the trend of US dollar strength or RBI/administrative action to stem the runaway expectation of rupee depreciation. However, this will be a short-term correction.”

On direct dollar sales to oil marketing companies,  Partha Bhattacharya, deputy chief executive officer, Mecklai Financial, said “there are debates if RBI should be selling dollars directly only to public sector OMOs, skipping private players. According to me, in such a scenario, they should sell dollars to all OMCs irrespective of their ownership, as this will help reduce intra-day volatility. The central bank should also keep all the defence-related dollar payments out of the market. That would also help reduce intra-day volatility.”