Rupee hits 8-month low on oil firms' dollar demand

The rupee hit an eight-month low on Wednesday, as global gains in the dollar ahead of the release of US Federal Reserve minutes later in the day and slumping crude prices spurred oil firms to accelerate their greenback purchases.  

According to currency dealers, nationalised banks resorted to heavy dollar buying to meet the demand of the oil marketing companies (OMCs).

The rupee ended at 61.96 compared with the previous close of 61.75. During intra-day trades, the rupee also touched a low of 61.99. Currency dealers believe it might touch 62 a dollar on Thursday. The rupee had ended at 62.04 on March 3.

Raghuvanshi, senior dealers (forex – treasury and correspondent banking), DCB Bank, said: “There was continuous dollar buying by nationalised banks. The rupee could breach the 62 mark tomorrow (Thursday). The rupee may even touch 62.20. By end-December, 63 also looks a possibility.”

The minutes of the Fed meeting will be released amid expectation of interest rate increase in the US. Reserve Bank of India (RBI) Deputy Governor S S Mundra had warned flight of capital from emerging markets in case the US reserves its interest rate stance.

Dollar has been strengthening against all major Asian currencies due to signs of recovery in the US that might trigger a rate hike sometime in 2015.

Mundra had, at the Investors’ Conference organised by Axis Capital last week, said: “However, notwithstanding the recent measures and policy buffers created since last year, it is highly likely that any reversal in the interest rate trend in the US would lead to flight of capital to the so-called ‘source’ countries, in the process, putting pressure on the domestic currency of the EMEs” RBI has released the speech of Mundra on its website.

The recent weakness of the domestic currency has also made RBI worried about unhedged foreign exchange exposures of the Indian corporate sector.

“The wild gyrations in the forex market have the potential to inflict significant stress in the books of Indian companies who have borrowed abroad as was evident during the financial crisis. This stress eventually hampers their debt repayment capability to the domestic lenders as well. It is precisely with this consideration that RBI has been advocating a curb on the increasing tendency of the corporates to dollarise their debts without adequate mitigation,” Mundra said.

RBI's inspection of banks’ books has highlighted the need for the banks to have more robust policies for risk mitigation on account of un-hedged foreign currency exposure of corporate entities. Inadequacies of data further complicate the impact assessment of such exposures across the banking system. “The banks have been advised to factor in this risk into their policies/pricing decision and also devise means for sharing of information on such exposures amongst themselves. Regulatory guidelines have also been since issued outlining the capital and provisioning requirements for exposure to entities with significant unhedged forex exposures,” Mundra added.

According to bankers, corporates are becoming more cautious on their hedging strategy. “There has been change in the perspective for corporates. Now more of them are starting to hedge,” said the head of treasury of a large state-run bank.