Rupee seen weak on month-end dollar demand

The rupee is expected to stay under pressure this week because of the month-end dollar demand from oil companies. In addition, fresh developments from the euro zone may trigger further fall in the exchange rate of the domestic currency.

On Friday, the rupee closed at 55.38 per dollar, 28 paise or 1.5 per cent up, compared to the previous close. The currency lost 1.7 per cent against the dollar over the week. Last week, the rupee also touched an all-time low of 56.40 against the greenback.

“The rupee is not yet out of trouble. Concerns over structural issues stay valid. The domestic issues revolve around policy catalysis and fiscal consolidation,” said Moses Harding, head-ALCO at IndusInd Bank.

Other than frequent intervention in the foreign exchange market, the Reserve Bank of India (RBI) is expected to take measures like meeting oil companies’ dollar demands directly. According to market participants, public sector oil marketing companies buy $300-400 million every day from the spot foreign exchange market.

RBI has sold $20 billion in the spot market since September 2011, to curb volatility in the rupee-dollar exchange rate. The central bank has also taken measures like increasing the ceiling of foreign currency bank deposit rates, curbing speculative trading arising out of forwards and futures arbitrage and asking exporters to convert half their dollar funds from Exchange Earners Foreign Currency accounts into rupees.

“Recent RBI measures to contain rupee weakness have so far been far less effective than measures introduced in the fourth quarter of 2011, in our view. And, the government and the central bank’s policy options to support the rupee currently appear limited,” said Rahul Bajoria and Siddhartha Sanyal, economists at Barclays, in a report. “We believe that FX intervention by RBI would not offer the rupee any meaningful or lasting support.”

The global risk-off mode, which added to the dollar’s strength against six major currencies, has also affected the fundamentally weak rupee. “The rupee could fall beyond immediate support at 56.50-57, if the dollar index extends its rally beyond 82.60-83.10,” said Harding.

Last week, the dollar index had risen up to 82, as markets worldwide feared the exit of Greece from the 17-nation euro currency bloc.