Rupee hits new low as foreign funds pull out

Threats of rating downgrade put pressure on currency.

The rupee hit a new low of 51.94 in intra-day trade against the US dollar, mainly owing to a growing risk aversion by foreign funds and rising dollar demand from importers, but recovered to close at 51.46, 30 paise lower than Friday’s close.

Overall, the Indian currency has weakened 4.15 per cent since last Tuesday, when global rating agency Standard & Poor’s lowered its outlook on India’s sovereign rating owing to growing government fiscal profligacy, raising prospects of a downgrade to sub-investment grade.

This steady weakening has been a big headache for exporters because they are now unsure of the level at which they should hedge their risks.

“There is too much bad news. The fiscal slippage has prompted rating agencies to put some sort of a rating watch and slowing economic growth is adding to the gloom,” said Tarini Vaidya, head of trading at HDFC Bank.

With foreign institutional investors (FII) already withdrawing large sums, a downgrade will only add to the rush out of India, since investors who use the FII route mandate investment in certain grades of instruments.
 

WEAK AND LOW
Currency / dollar	Jan 1, '09	Mar 2, '09	% chg
Korean won	1259.55	1570.65	-24.70
Indonesian rupiah	10875.00	12010.00	-10.44
Indian rupee	48.77	51.94	-6.51
Thai baht	34.78	36.25	-4.23
Malaysian ringgit	3.47	3.73	-7.51
Singapore dollar	1.43	1.55	-8.36
Taiwan dollar	32.82	35.17	-7.16
Hong Kong dollar	7.75	7.76	-0.08
Japanese yen	90.74	97.25	-7.17
British Pound	1.47	1.41	3.94
Euro	1.40	1.26	10.33
Source : Bloomberg

Data from the Securities and Exchange Board of India (Sebi) shows that FIIs have been net sellers in the equity market to the tune of $1.35 billion since last Tuesday. In the debt segment, too, net sales have been of the order of $409 million.