Stability of rupee expected to sustain

Observers say this is likely if RBI keeps key policy rates unchanged

The rupee, very volatile in recent times, has stabilised after the Reserve Bank of India (RBI) announced liquidity tightening measures earlier this month.

According to the Street, the stability will sustain if RBI doesn’t make any change in the key policy rates in the first quarter review of monetary policy the coming Tuesday.

The liquidity tightening measures were announced on July 15 and since then the rupee has never closed by breaching the 60 a dollar mark..



However, month-end dollar demand has been keeping it under pressure. “The actions taken by RBI on July 15 were fairly dramatic. It does seem difficult to see RBI in the short run letting the rupee collapse again. For a month, 58-60 a dollar will be the range,” said G Ananth Narayan, head of global markets, South Asia, Standard Chartered Bank. On Tuesday, the rupee ended at 59.77, compared with Monday’s close of 59.72. It had opened at 59.53 and in intra-day trade, touched a high of 59.48 and a low of 59.87 a dollar.

“The rupee weakened today due to month-end dollar demand by importers and defence- related payments. The weakness will continue till month-end but I do not see closing at 60 a dollar,” said a currency dealer with a public sector bank.

On July 15, RBI delivered a surprise 200-basis points rise in the Marginal Standing Facility. This came with a cap on banks’ repo borrowing to Rs 75,000 crore a day and the announcement of the absorption of market liquidity through the open market sale of government securities.

“The action RBI took on July 15 has proved beneficial. The sustainability will continue and we will see the rupee stabilise around 59-59.50. If status quo is maintained, the stability will be sustained,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank, and chairman of the Fixed Income Money Market and Derivatives Association of India.

RBI will review the monetary policy on July 30. Most economists are expecting no change in the key policy rates. The repo rate (at which RBI lends to banks) is 7.25 per cent; it was cut once this financial year, by 25 bps.

A few experts believe the rupee could touch a new all-time low in 2013. “Although the government and RBI have announced many stop-gap measures, we believe these will only be effective in the short term and the key risks to the rupee remain intact. These risks include vulnerability to (US) Fed quantitative easing tapering concerns, high foreign positioning in local equities and risks from RBI’s recent liquidity tightening measures, short-term external debt obligations in a weak local growth backdrop and risk of a significant China slowdown,” said a report by Nomura last week.

It had projected the dollar/rupee trending gradually lower in the fourth quarter, after hitting a peak in the third quarter. Nomura also maintained a 62.5 dollar/rupee forecast for the end of the third quarter.