Rupee hits record low, makes it difficult for RBI to cut rate

In toay's opening trade the partially convertible rupee was at 58.35 per dollar, a life low

The rupee on Monday hit a record low to close at 58.14 a dollar, as foreign institutional investors (FIIs) withdrew from the country and the outlook on India’s current account deficit continued to be bleak. The fear that the US Federal Reserve might lower the pace of quantitative easing also weighed.

After opening at Rs 57.26 a dollar on Monday, the rupee touched an intra-day high of Rs 57.16 before closing at Rs 58.14 — down 1.87 per cent from Friday’s close of 57.07. On Monday’s closing level beat the Indian currency’s previous worst of 57.32 per dollar on June 22 last year. This was also the sharpest single-day fall of the rupee since September 22, 2011, when it had weakened 2.57 per cent (124 paise) against the dollar.

FIIs have withdrawn $ 2.7 billion from the Indian debt market since the end of May. The government, however, tried to play down the rupee’s depreciation, calling the panic among investors unwarranted.

“There is weakening of all currencies vis-à-vis the dollar. So, the rupee, too, is affected. But there is a panic in the market that is unwarranted. This started off with a misinterpretation of what the Fed chairman spoke of in terms of quantitative easing. They have now more than clarified that this (early withdrawal of quantitative easing) is not imminent,” said Economic Affairs Secretary Arvind Mayaram.

According to bankers, the rupee’s weakness will make decision-making difficult for RBI, which expected to further ease its stance in its mid-quarter review of monetary policy on June 17, to revive growth. After India’s economy grew at the slowest rate in a decade last financial year, the central bank has cut the repo rate by 75 bps this year.

“The sharp and sustained weakening of the rupee will make it difficult for RBI to cut rates in June. It complicates near-term macro management — pushing up inflation, increasing fuel subsidies, and putting pressure on unhedged corporate balance sheets,” said JPMorgan India Economist Sajjid Chinoy.

Market participants see the rupee weakening further on dollar demand from importers and as FIIs continue to withdraw from India.

“The rupee will continue to trade weak till RBI is able to recoup the $60-billion forex (including forwards) sold since 2008. Keeping rates high will only defer recovery, deter FII equity inflows and delay re-accumulation of forex reserves,” said Indranil Sen Gupta, India economist, Bank of America-Merrill Lynch.