Rupee ends weaker as Fed further cuts stimulus

Month-end dollar demand by importers adds to the fall

The rupee ended weaker on Thursday, as the US Federal Reserve announced further tapering. In the wake of economic recovery, the Fed announced a further cut of $10 billion in its bond-buying programme for a third time, at a meeting chaired by chief Janet Yellen on Wednesday. After the latest cut, the programme currently stands at $55 billion a month.

The Indian currency ended at 61.33 on Thursday, compared with the previous close of 60.96 against the dollar. The rupee had opened at 61.39.

“The rupee weakened due to the US Fed’s decision, as well as month-end dollar demand from importers. Besides, nationalised banks were buying dollars to meet the defence payments requirements and dollar demand of oil marketing companies (OMCs),” said Sandeep Gonsalves, forex consultant and dealer at Mecklai & Mecklai.

According to estimates of currency dealers in state-run banks, the dollar demand of these public-sector OMCs are in the range of $6-7 billion a month.

According to Ashutosh Khajuria, president (treasury) at Federal Bank, till the end of this month, the rupee would trade in the range of 60.50 to 62.50. “There are three factors influencing the rupee. The Reserve Bank of India (RBI) buying dollars from the market, importers’ dollar demand and dollar inflows and outflows in the domestic market.”

The month-end dollar demand from importers is a major dampener on the rupee. On August 28, 2013, the rupee had touched an all-time low of 68.85 against the greenback during intra-day trades due to heavy month-end dollar demand from importers. Although the situation has improved since then due to various steps by the government and RBI, further weakening of the rupee from the current levels cannot be ruled out.

“If the Fed announcement had come six months ago, the rupee’s drop would have been much steeper,” said Paresh Nayar, head of currency and money markets at FirstRand in Mumbai. “Sentiment has turned. The Fed statement was discounted to a large extent and we even saw some inflows today.”

The euphoria before the general elections has helped domestic markets to attract dollar flows from foreign investors. However, it is also agreed that most of these dollar flows are being absorbed by RBI in its foreign exchange reserves.

Foreign exchange reserves rose by $1.09 billion for the week ended March 7 to $295.45 billion, show RBI data, according to which the foreign exchange reserves are back to the April 2013 levels.

Tracking the weakness in the rupee, government bond yields rose on Thursday. The yield on the 10-year benchmark government bond 8,83 per cent 2023 ended at 8.82 per cent, compared to the previous close of 8.78 per cent.