Rupee weakens to 10-month low

Month end dollar demand, strengthening greenback vs global currencies pulled rupee to its lowest levels in 10 months

The rupee weakened to its lowest in 10 months on Wednesday, tracking broad dollar gains against other global currencies. Besides, month-end dollar demand from oil importers kept it under pressure. According to dealers, the currency could weaken further as the central bank was not expected to intervene aggressively in the foreign exchange market to protect reserves.

The rupee opened at 56.16 against the dollar and during the day it touched a high of 56.06 and a low of 56.38 before closing at 56.17. It had closed at 55.97 a dollar yesterday. The rupee had ended at 56.16 on July 25, 2012.

“There is month-end dollar demand from oil importers and the dollar has strengthened against other currencies in the international market. These factors are keeping the rupee weak,” said Akhil Thomas, assistant manager (forex), Federal Bank.

The rupee had breached the 56-mark on May 23 when it touched 56.01 per dollar.

“The dollar rose among other global currencies due to upbeat US housing and consumer confidence data. The fourth quarter gross domestic product data is also expected to be weak due to which the rupee may fall further in the next few days,” said S Srinivasaraghavan, executive vice-president and head-treasury of Dhanlaxmi Bank. According to dealers, the real effective exchange rate, basically the weighted average of India’s currency relative to an index or basket of other major currencies, adjusted for the effects of inflation, is also expected to rise from current levels.

REER is a six-currency trade-based weights constituted in December 2005. It rose to 106.4 for March, while it was 105.04 in January, show Bloomberg data. The new six currency indices represent the US, the Euro zone, the UK, Japan, China and Hong Kong.

Foreign Institutional Investors (FIIs) invested $168.73 million in domestic markets on Wednesday, compared with a pull-out of $36.83 million on Tuesday, show data from the Securities and Exchange Board of India.

Few dealers in the Street are of the view the Reserve Bank of India (RBI) has been intervening in the market to arrest volatility, but it’s not able to do much due to depleting forex reserves. “RBI will intervene but may not be effective to guide reversal. It would need exporters to get the fear of sharp reversal to accelerate sale of long-term dollar receivables,” said J Moses Harding, head of asset-liability committee and economic and market research, IndusInd Bank.

According to Harding, in the absence of support from RBI and FIIs, there is high probability of the rupee posting a historic low above 57.32 a dollar. “It’s possible that FIIs will get into a wait-and-watch mode while RBI delays further rate cut. The rupee is into near term trading range of 55.85-57.35,” he said.