Rupee closes at record low of 58.77 a dollar

Outcome of US Fed meet on quantitative easing eyed

Ahead of the US Federal Reserve’s tomorrow meeting to decide on keeping interest rates low, the rupee on Tuesday hit an all-time closing low of 58.77 a dollar — 1.57 per cent weaker than yesterday’s close of 57.87 a dollar.

Besides global factors, domestic issues like dollar demand from oil companies and a large public-sector bank buying dollars to fund a defence-related deal also exerted pressure on the currency. Dealers said the Reserve Bank of India (RBI) did not intervene to stem the depreciation on Tuesday but might do so if the rupee approached 59-a-dollar level. RBI had sold dollars via state-run banks when the rupee had on June 11 touched 58.95 a dollar — the currency’s all-time intra-day low.

“The rupee is falling because there is a lot of dollar demand from custodian banks, oil importers and defence-related payments,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

According to dealers, any effort from the US Fed to scale back efforts to keep interest rates low will turn investors towards dollar, weakening all currencies.

Market participants have been seeking government steps to attract foreign inflows to support the rupee.

“The rupee has reached a level where we need reforms. There should be FDI reforms and some announcement on NRI bonds. Currently, the rupee is at a level where RBI might intervene to arrest the depreciation,” said the treasury head of a large public-sector bank.

Foreign institutional investors have net-sold debt of $4.7 billion over 18 sessions, while outflows from the equity market have also been picking pace. In its mid-quarter review of the monetary policy, RBI said a sudden withdrawal or halt of FII inflows could be key risk for the rupee. It was in view of the currency’s recent sharp depreciation against the dollar that kept the central bank from cutting rates yesterday.

The rupee has depreciated 9.22 per cent against the greenback since May and has been the worst-performing Asian currency during this period. Among BRICS nations, only the South African rand has depreciated more against the dollar since May.

India’s high level of current account deficit (CAD) — at 6.7 per cent of GDP in the quarter ended December — is also being cited as a major reason for the rupee’s recent weakness. Policymakers, however, see CAD improving to four per cent of GDP in the fourth quarter of 2012-13 due to various steps taken by the government and RBI to curb gold imports.

Some experts believe RBI should not sell dollars to stem the rupee’s fall, as the fate of the currency will be determined by global factors. “We continue to highlight that RBI has to recoup forex reserves — rather than hold rates — to stabilise the rupee. India’s forex reserves have halved to seven months of import cover in the past four years, trailing BRIC levels,” Bank of America-Merrill Lynch said in a note to its clients.