Rupee dancing to market tunes than fundamental notes: CARE Ratings

Domestic rating outfit agency CARE Ratings on Thursday said the Reserve Bank India (RBI) has limited scope to directly intervene in the market to stem the rupee's slide, thus allowing the rupee's "free fall" .

Volatility in the rupee has continued to persist as the rupee has breached all psychological levels starting 60, 62 and even 65. Repeated efforts of the RBI and the government to cap the fall in the rupee have yielded limited results, the rating agency said.

As a step to curb the sharp fall in value, the central bank and government have tweaked interest rates to curb outflow of funds and initiated moves to attract foreign investments through foreign direct investment/foreign institutional investor (FII) routes and non resident indian deposits. They have also imposed restrictions on gold imports and policy actions to boost investor confidence.

Though FIIs continue to maintain negative net investment positions, it has not resulted in sharp outflows.

There is definitely more than fundamentals that is driving the adverse move in the exchange rate, CARE said.

"We expect such volatility in the rupee rate to continue. With the exchange rate crossing the Rs 65 to a dollar mark and limited scope for the RBI to intervene directly (given constraints on forex reserves), such free fall might persist amidst uncertainty," said Madan Sabnavis, its chief economist.

The US Federal Reserve's meet would perhaps bring more clarity. As uncertainty fades and growth prospects shape clearly, the rupee is expected to revert and stabilise in the range of Rs 58-60 to a dollar by the end of this financial year. This we believe would still be the level based on fundamentals. Amongst available options on strategies to curb the fall in rupee, the Indian government and monetary authorities are expected to favour quasi-sovereign and sovereign bond issues to shore up forex reserves, rating agency said.

Pledging of gold and approaching the International Monetary Fund for assistance or line of credit might be viewed as being the last resort, it added.