Rupee likely to remain weak despite RBI measures

The measures introduced by the Reserve Bank of India (RBI) to attract dollar flows may not help in the near term, say economists and forex dealers. Market expects more such steps and aggressive intervention to arrest rupee fall.

Rupee crossed the psychological mark of 52 against the dollar early last week and closed at 52.25 on Friday, lower by 90 paise or 1.7 per cent, as compared to the previous week.

This week, the rupee is expected to stay under pressure. “I expect rupee to trade in the range of 51.50-53 against the dollar, as both domestic and as global factors are not in its favour," said Ashutosh Raina, chief dealer, HDFC Bank.

RBI increased interest rates on foreign currency deposits by up to 100 basis points, raised the all-in-cost ceiling by 50 basis points on external commercial borrowings and withdrew the $100-million cap on net foreign currency inflows via rupee swaps last week. According to market participants, the central bank also intervened in the foreign exchange market to the tune of $2.5-3 billion, to tame the volatility.

Economists said these measures might be of some help, but more efforts and thinking would be required to put rupee back on track and shield it from global economic shocks.

"The recent spate of capital liberalisation measures, however, are unlikely to have an immediate positive impact on the rupee, especially as global risk aversion and US dollar strength continues," said Taimur Baig and Kaushik Das, economists at Deutsche Bank. The central bank could sell forex to oil marketing companies directly (as it had done in 2008-09) against oil bonds, thus helping reduce demand for US dollar buying from the market for payment related to oil imports, they wrote in a report. On an average, India imports $10-12 billion of oil per month.

"Our forecasts factor in continued near-term weakness and a modest medium-term bounce by mid-2012 on account of relatively high domestic growth, favourable composition of external debt and a domestically financed fiscal deficit," said Rohini Malkani and Anushka Shah, economists at Citigroup Global Markets.