Rupee Breaches 40-Level, Dealers See Further Slide

The rupee breached the psychological mark of 40 per dollar yesterday, touching an intra-day low of 40.24 before closing at a new record low of 40.03. Even the one-month forward touched a record high, crossing 20 per cent as importers rushed for cover.

Forex market sources predicted that the rupee would fall further as the demand for the greenback continues to be strong. Dealers expect the rupee to touch 43 in the next few days, unless the Reserve Bank of India (RBI) intervenes strongly.

The strong dollar demand was evident in the market yesterday with the rupee moving only one way down and banks not selling dollars. The situation forced the RBI to sell spot dollars worth an estimated $ 40 million.

Forward premia also shot up, particularly for the near term. The one-month premium closed at 20.85 per cent, the three-month at 13.4 per cent, the six-month at 10.48 per cent and the 12-month at 11 per cent.

Market players described the rupees fall as a correction and said it had remained unnaturally steady between September 1996 and August 1997. Partho Mukharjee, chief dealer, UTI Bank, said, Taking into account the given circumstances, the rupee is at a justified level against the dollar because it is the demand from the merchandiser that has driven the rupee to an all-time low.

However, dealers added that the premia were overshooting on account of the strong bearish sentiment in the market and the huge corporate payable positions that are still to be covered.

The rupee opened at 39.85-90, against Tuesdays close of 39.89-90. It dropped quickly in the morning and slipped to 40.24 before 11:00 am, prompting the RBI to step in. Finance secretary Montek Singh Ahluwalias statement that the currency situation was not alarming led to the rupee being hammered further.

With the rupee continuing its descent, some corporates rushed in to cover for the near term, putting pressure on the premia. The RBI then intervened in the forward market, trading swaps for the July maturity.

A section of treasurers now expects the rupee to fall to 43 before some semblance of stability returns to the market. Banks point out that corporates are sitting on a mountain of unhedged payable positions. Says S Anand, senior vice president, IDBI Bank, The depreciation of the rupee is on account of genuine demand from the market.

Taking a perspective on the market, players say there is a case for the RBI overhauling its exchange rate management policy of intervening only to curb excessive volatility. The rupee saw unnatural stability during the

10-12 month period up to August 1997, during which it actually appreciated. The appreciation was a result of dollar inflows from overseas corporate borrowings, foreign portfolio and direct investment flows, and NRI investments. During this period, the RBI kept intervening in the market.

Dealers said if the RBI had let the rupee appreciate, corporate demand might have come in, finding the levels attractive. Market forces would automatically have then pushed the rupee down.

Instead, by intervening , the RBI added to the distortions. By intervening, the RBI sent signals that it would not let the rupee move beyond a certain range. This made corporates complacent, resulting in unhedged payables mounting, the dealers said.