The Indian rupee on Wednesday fell 0.86 per cent against the dollar on weak economic numbers. The currency crossed 72 a dollar, but the Reserve Bank of India (RBI) did not intervene. The currency slid to a two- month low.
The rupee closed at 72.09 a dollar, lowest since September 4. This was its biggest single-session fall since September 16. The currency shed the most in Asia, and year to date, it has fallen 3.22 per cent. The dollar index, which measures the greenback’s strength against major global currencies, rose 0.05 per cent to 98.35.
The index of industrial production (IIP) contracted by 4.3 per cent, worst in seven years, and economists are expecting the gross domestic product growth to be at little higher than 4 per cent, and definitely lower than the first quarter’s 5 per cent. The equities market is in pressure, and so has been the rupee.
“Rupee has been under pressure since the sovereign outlook downgrade by Moody’s. There is demand (for dollars) in the market, and some importers were caught unhedged, while some exporters were overhedged. Some short positions have been triggered,” said Paresh Nayar, head of foreign exchange and fixed income at First Rand Bank.
Currency dealers say depreciation bias in the rupee would continue but the crucial point to be watched would be 72.40 a dollar that it hit in intraday trade in September. On a closing basis, though, the level was reached a year ago.
But the loss in rupee should be a breather for the central bank. On a 36 currency trade basket basis, rupee has been overvalued. In September and October the real effective exchange rate (REER) of the rupee has been above 116. In October last year, the REER value was less than 110.
On a six currency basis, the REER has reached 125 level, against 117 a year ago. An overvalued currency indicates loss of export competitiveness, and at a time when China has devalued its currency, most of the Asian currencies have fallen sharply to preserve their export competitiveness. Rupee has also fallen since July’s 69 a dollar level, but not as sharply. Rather, it has remained largely rangebound.
Currency dealers say the rupee will have to let off some of its steam, even as such considerations are not driving the exchange value as of now.