RBI helps rupee and stocks recover

Bankers, analysts warn any strength in rupee would be temporary unless govt announces stringent measures to curb high CAD

The Reserve Bank of India (RBI) on Tuesday rescued domestic financial markets from extending the free fall seen in the past two days. Its intervention in both spot and forward currency markets helped the rupee stage a smart recovery after breaching the 64-a-dollar mark in early trade, and also helped the equities market recoup some of its losses.

However, RBI’s efforts were not potent enough to stop the rupee from closing at a record low. The  currency ended 10 paise weaker than its previous close to end the day at 63.23 a dollar. On Tuesday, it had opened at 63.71 a dollar.

RBI’s decision to simplify rules for investment in shares and debentures of Indian companies listed on a local exchange by non-resident Indians (NRIs), announced before the closing hours of trade, also improved sentiment for the currency. But, bankers and analysts warned a strength in the rupee might be temporary, unless the government announced stringent measures to narrow the country’s current account deficit —considered the main reason for the Indian currency’s weakness.

The slide in the Indian currency, of 16.5 per cent against the dollar so far this year, has made it the worst-performing among the Asian ones. This weakness has also had a rub-off on stock markets.

The BSE Sensex on Tuesday closed at 18,246 — 61.48 points, or 0.34 per cent, lower than its previous close, after recovering from the day’s low of 17,970.98. The NSE Nifty dropped 13.30 points, or 0.25 per cent, to end at 5,401.45. Stock markets have been tracking the rupee’s weakness over the past few months.

Though key indices on Tuesday ended weak for a third straight day, the losses were much lower than those in the past two days, due to short-covering after a brief rebound in the rupee.

Analysts and investors believed it was too early to conclude the worst for the markets was over, as a lot was dependent on the rupee’s stability. Citigroup likened this phase to the one between 1995 and 2003.

“India seems set to go back to its ‘old normal’ (FY95-03): Lower growth, higher uncertainty and yes, lower market multiples,” said Aditya Narain, managing director (research), Citi Global Markets India, in a client note.

As month-end dollar demand persists, currency experts believe 65-a-dollar value for the rupee might not be very far. “If there is a large demand for dollar, for defence-related payments, or FII outflows from stocks or bonds, the next resistance level for the rupee will come at 65.20-65.30 a dollar. A suggestion from my side to arrest the rupee’s depreciation would be RBI considering swapping its gold reserves for buying dollars,” said Partha Bhattacharya, deputy CEO, Mecklai Financial.

The rupee weakened even against the pound sterling and breached the 100 mark to touch a low of 100.33 a pound. However, it later recovered to close 99.03, compared with the previous close of 98.80.

On Tuesday, foreign institutional investors (FIIs) net-sold Rs 680-crore shares, according to provisional data. In August so far (till Monday), these investors had net-bought to the tune of Rs 445 crore.

Tracking the weakness of the rupee, the yield on the 10-year benchmark government bonds touched 9.48 per cent — a high of more than five years — in intra-day trading. However, with the recovery in the rupee, the yield softened to 8.91 per cent.

“The concerns in the market are the falling currency and funding of high current account deficit. With the yields touching five-year highs today, the government’s borrowing programme will also get expensive. That will add more pressure on the fiscal side,” said Yadnesh Chavan, head (fixed income), Mirae Asset Global Investments India.