Rupee closes below 57 a $

Expected narrowing in CAD, strong inflows seen as saviours

The rupee, which on Friday breached the 57-a-dollar closing level for the first time since July last year, came close to its all-time low of 57.33, on concerns that the US Federal Reserve might lower the pace of its quantitative easing and continued demand from domestic oil companies.

The Indian currency has dropped 5.7 per cent since the beginning of May to be the worst-performing Asian currency during the period. The central bank has not intervened aggressively to stem the fall.

Governor D Subbarao reiterated the Reserve Bank of India (RBI) did not target any exchange rate and would intervene only to curb volatility.

“RBI does not target any exchange rate. We intervene in the foreign exchange market only to manage the volatility and disruption to the macroeconomic situation,” PTI quoted Subbarao as saying in Hyderabad.

On Friday, after opening at 56.73 a dollar, the rupee touched an intra-day low of 57.13 before closing at 57.07, compared with yesterday’s close of 56.85 a dollar.

The central bank has not been seen intervening aggressively as the present weakness is mainly due to global factors.

Subbarao also warned a high level of current account deficit (CAD) could feed into a weakening rupee and calibrating the monetary policy in such an environment would be a challenge. CAD hit 6.7 per cent of GDP in the third quarter of 2012-13, though it is expected there will be some improvement in the fourth quarter, data for which will be out next week.

The Indian currency had seen its lowest closing level of 57.33 a dollar on June 22 last year.

The continued weakness in the value of the currency has worried many. However, some positive signs, such as strong capital inflows and better CAD figures going ahead, are seen as some likely positives that could support the rupee. According to a report by Deutsche Bank, the current account deficit is likely to narrow substantially as gold and oil prices decline, while weak growth and policy measures lower import demand.

“The rupee breaching 57 is a worry. But, at the same time, there could be a pullback in the short term, as dollar inflows are expected to increase. It is likely that remittances will come in. We will see exporters encashing their receivables. Over $5 billion is expected to come from Unilever Plc’s open offer,” said N S Venkatesh, chairman Fixed Income Money Market & Derivatives Association of India and head of treasury at IDBI Bank.

“To that extent, the rupee might stabilise at the 56 level in the short term. But there is definite weakness due to the current account deficit problem,” he added.