Rupee down but Street thinks it's temporary

Rajan says India not immune to global markets

Though the rupee breached the 61 level against the dollar for the first time in four months following global cues, the weakness could be short-lived, as dealers believe the central bank has enough ammunition to curb extreme volatility.

The Reserve Bank of India (RBI) has been mopping up dollars, and has not allowed the rupee to appreciate beyond 59 despite foreign inflows. RBI’s foreign exchange reserves are at $ 318 billion, just short of all-time high levels.   

According to foreign exchange dealers, a month down the line, the rupee is likely to trade at 60 to a dollar.

On Friday, despite intervention in the foreign exchange market by RBI, the rupee ended weak at an over four-month low breaching the 61 to a dollar mark due to sharp gains in the US currency among other international currencies. According to currency experts, the pick-up in the US economy with strong gross domestic product (GDP) numbers has raised concerns that capital inflows in emerging markets might slow down. To add to that, the news on Argentina's default on bond payments has led to investors opting for dollars, which is considered a safe haven.

The rupee ended at 61.19 compared with its previous close of  60.56 to a dollar. In the last two days, the rupee has weakened by more than Rs 1 and since the start of this financial year, it has depreciated by more than two per cent.

RBI Governor Raghuram Rajan said in New Delhi on Friday that India was not immune to global markets.

“The weakness in the rupee is due to international factors like Argentina's default and strong US GDP numbers. The dollar is appreciating against all other currencies due to which the rupee is also weak. The equity markets were also down today which dampened sentiments for the rupee. There is a move towards safe haven like the dollar,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

However, currency experts believe the weakness in the rupee is a temporary phenomena and a month down the line, the situation will improve. Moses Harding, group chief executive officer (liability and treasury management) & chief economist of Srei Infrastructure Finance believes one month down the line the rupee might trade at 60 to a dollar. “While the US Fed impact will result in set up of bearish momentum on the rupee from higher US yields and firm dollar, positive domestic cues from higher growth, lower inflation and prudent management of twin-deficit will extend strong support for the rupee for short term stability at 59-61,” he said.

Venkatesh too expects the rupee to trade at 60 a month down the line. Though RBI does not have a level of the rupee in mind, currency dealers agree that the central bank will not let the rupee weaken sharply in a short span of time.

“The upside may be capped at 61.50 due to global uncertainties. The rupee may continue to trade weak unless there are dollar supplies. RBI may be conformable with the rupee trading between 60.50 and 61.50 because it is a competitive level for exporters and importers,” said Naveen Raghuvanshi, currency trader, DCB Bank.