Amid a strengthening dollar and the global risk aversion, the rupee has fallen by 9.5 per cent in the last two months. While there are fears that a weakening rupee may further fuel inflation, the central bank’s intervention , aimed at supporting the currency, may not be of much help.
Led by a strong demand for dollars and an arbitrage opportunity in the forwards segment today, the rupee closed at a two-year low of 48.34 against the dollar.
“The general dollar squeeze in the system has led to an arbitrage opportunity between the three-month onshore and offshore dollar forwards with spreads of around 30 paise,” said Moses Harding, head (global markets group), IndusInd Bank. If this continues, the rupee would remain under pressure, and intervention from the Reserve Bank of India (RBI) may not help. Harding expects the rupee to touch 49-levels this week, if global sentiment remains the same.
“RBI intervention in the foreign exchange market is necessary to check not just the fall, but also volatility in the rupee. Besides, due to the global slowdown, exporters may not benefit to a great extent because of the depreciation,” said Madan Sabnavis, chief economist, CARE Ratings.
RBI currently holds foreign exchange reserves worth $316 billion, a record high. It may also supply dollars to arrest the volatility and limit imported inflation. However, forex strategists Priyanka Kishore and Nagaraj Kulkarni at Standard Chartered Bank feel significant RBI intervention to stem the rupee’s depreciation may strain liquidity to undesirable levels. Liquidity is already in a deficit mode, and banks are drawing around Rs 40,000 crore from RBI’s repo window daily.
RBI has, on various occasions, said the objective intervening is limited to only curbing volatility, not fixing an exchange rate. Because of the low intervention policy, the rupee has achieved the distinction of being the most ‘market-determined’ among Asia (excluding Japan) currencies, Kishore and Kulkarni said in a note.
“I think RBI shouldn’t intervene now because the rupee’s depreciation is largely because of global factors and risk aversion due to euro zone concerns, not domestic factors,” said A Prasanna, economist, ICICI Securities Primary dealership. In terms of volatility, rupee has fared fairly well, and it would be better to wait and watch the steps the US Federal Bank took, he added.
Though RBI data shows it has not transacted in the foreign exchange markets between November 2010 and July 2011, market participants believe there was an intervention last week when the rupee touched 48-levels.
“It is evident that this small intervention did not help much, since volatility still persists, and the rupee continues to weaken,” said a treasury official of a Mumbai-based public sector bank.
