Rupee weakens marginally due to tapering concerns

Fear of tapering was reflected in the market today

Even as the foreign exchange market has factored in a $10-billion tapering by the US Fed of its quantitative easing programme, the Street is worried about a higher amount. This concern was reflected in the foreign exchange market on Wednesday, when despite dollar flows by foreign banks, most decided to cover their foreign exchange positions in advance, ahead of the conclusion of the two-day meeting of the Federal Open Market Committee (FOMC).

The rupee ended marginally weak at 63.39 against the dollar on Wednesday, compared with the previous close of 63.37. The Indian currency had opened at 63.42 and, during intra-day trade, had touched a high of 63.08 and a low of 63.43 against the greenback.

“The expectation is for a marginal cut in liquidity support by $10 billion or so, which has been already factored in. The tone will be important, which will set up the expectation of pace of further reduction in liquidity support,” said J Moses Harding, executive director and chief business officer at Lakshmi Vilas Bank. According to Harding, if the quantum of tapering is less than $10 billion, the rupee will trade in the range of 62-63 against the dollar. If tapering is at $10 billion, the rupee will trade at 63-64, while if the quantum is above $10 billion, the trading range will be 64-65 against the dollar.

The Street believes the rupee might touch 65 per dollar if the Fed resorts to tapering in the range of $10-20 billion. “The Reserve Bank of India (RBI) may not allow sharp depreciation in the rupee. If the tapering is in the range of $10-20 billion, the rupee will trade in the range of Rs 63.50-65.00,” said Sandeep Gonsalves, forex dealer, Mecklai & Mecklai.

The rupee has already weakened by almost 17 per cent since the start of this financial year. Last month, it had even touched an all-time low of 68.85 in intra-day trades. The recovery from there has been due to various steps taken by RBI and heavy dollar sale through state-run banks acting on behalf of RBI.

With RBI set to review the monetary policy on Friday, currency experts expect more steps to prop up the rupee. “I do not think the steps will be in the form of further tightening of liquidity. But yes, RBI may announce some more measures,” said the treasury head of a large public sector bank.

According to experts, the rupee will strengthen by the end of this financial year. “We expect the rupee to appreciate to 59-61 against the dollar by end-March 2014. The expectation is based on recent policy measures taken by RBI, resumption of capital inflows, passage of economic reform bills in the recently concluded parliament session, lower current account deficit in FY14 and pick-up of economic growth momentum from third quarter of FY14,” said Sunil Kumar Sinha and Devendra Kumar Pant of India Ratings & Research.