Rupee logs first monthly gain since April

Q1 CAD figures to provide strength

With the current account deficit (CAD) for April-June quarter in line with what the Street expected, this may help the rupee to strengthen against the dollar.

While the deficit had widened compared to the previous quarter,  mainly due to seasonal factors, market participants expect this to reduce after several curbs on gold import were imposed by the government and the Reserve Bank of India. The rupee recorded its first monthly gain since April, up 4.7 per cent against the dollar. After a depreciation of 22 per cent in April-August, the rupee held ground this month, following steps announced by new RBI Governor Raghuram Rajan to boost inflows. Since April, it has weakened 15 per cent against the dollar.

“The rupee has recovered drastically after hitting the all-time low of 68.85. It was speculated that the trade in the offshore market was responsible for such a brutal move. RBI recently met with a handful of foreign banks and asked them to stop acting as market-makers for rupee NDFs (non-deliverable forwards),” said Abhishek Goenka of India Forex Advisors.

On Monday, the rupee opened at 62.99/dollar as compared to the previous close of 62.50 but pared most of the losses after foreign banks sold dollars for custodial clients as it closed at 62.62. “The rupee has not weakened sharply during the month end, unlike the previous months, mainly due to the separate dollar window opened by RBI for oil importers,” said a senior treasury official of a public sector bank.

Bankers said foreign currency inflows would strengthen in October and November, as a host of banks are preparing to raise funds through the twin swap windows announced by RBI. Rajan, on the day he took charge, announced the central bank would offer a window to banks to swap their incremental FCNR (B) deposits, mobilised for a minimum of three years, at a fixed rate of 3.5 per cent for the tenor. RBI had also removed the cap on FCNR (B) deposits, done earlier with domestic deposits, to give more flexibility to banks while pricing their products. RBI also raised the borrowing limit abroad for banks, from 50 per cent of unimpaired tier-I capital to 100 per cent.

Additionally, banks can swap such borrowing with RBI at a concessional rate of 100 basis points below the ongoing swap rate.

The current account deficit for Q1 was in line with the expectation at $21.8 billion or 4.9 per cent of gross domestic product, data released on Monday showed. Still, it was wider than the $18.2 bn or 3.6 per cent of GDP in the three months ending March, on a seasonal slowdown in exports and firm imports.

The gap was expected to widen  as exports are typically lower in the first quarter. However, in the next quarters this is likely to reduce, as the government and the central bank had imposed various curbs on gold imports.

The CAD touched a record high in 2012-13 at 4.8 per cent of GDP, much higher than RBI’s “comfort zone” of 2.5 per cent. The CAD has been high for the past three years, weakening the rupee against the dollar.