Rupee to stay volatile this week too, believe observers

After witnessing huge movements triggered by global jitters, the rupee may continue to witness volatility tomorrow, albeit on a lesser scale.

Foreign exchange dealers said besides heightened risk aversion due to fear of recession and sovereign defaults, the month-end demand from importers, especially oil companies and those to settle foreign currency trades, would weigh on the rupee.

On Friday, the rupee rebounded to close at 49.43 against the dollar. It had closed at the day's high of Rs 49.59 on Thursday.

The treasury head of a medium-size private bank said on Friday the volatility was much more, due to shifts both ways. This would continue next week.

The rupee fell sharply, tracking huge sell-off in domestic equity indices due to increased risk aversion. Globally the dollar strengthened on safe haven flows. The rupee has fallen by 8.3 per cent in a month.

Ashutosh Khajuria, president (treasury) at Federal Bank, said the worst seemed to be over for the rupee. There may not be much much downside, though volatility would be still around. Any further fall will add to price pressures, with policy makers concerned about inflation.

Speculative trades may exert less effect on the rupee’s value. Arbitrage between the NDF market (non-deliverable forwards, an offshore market to trade and hedge in currencies of countries where there is no full convertibility) market and the OTC (over-the-counter) market (a decentralised market of securities not listed on an exchange), as well as the spot market for the rupee, had shrunk to 15p last week from a difference of 50-60p a few weeks before, said a treasury head with a large public sector bank.

Meanwhile, Union finance minister Pranab Mukherjee discussed the depreciating rupee with Reserve Bank governor D Subbarao in Washington DC. Both are in the US capital to attend the annual meetings of the International Monetary Fund and the World Bank.

India is a current account deficit economy with slowing growth, accompanied by worries on the fiscal side. Also, with high inflation, the bias for the rupee would be on the depreciating side, according to Indranil Pan, chief economist with Kotak Mahindra Bank.

In the recent quarters, the concerns for the balance of payments were argued more from the current account side, due to the high oil and commodity prices. Even as oil and commodity prices could fall with the global slowdown story, exports and invisibles are also likely to suffer.