Markets expect further weakening despite RBI intervention.
A strong demand for dollars from importers, including the three public sector oil marketing companies, pushed the rupee below the 44-mark after a gap of 17 months.
The rupee opened at 43.93 and within minutes breached the 44-mark on bunching of demand for dollars.
The currency hit a low of 44.15/17 during the day before ending at 43.85. The rupee strengthened towards the close of trading due to sale of greenback by the Reserve Bank of India, according to foreign currency dealers.
With the rupee continuing to depreciate, oil and fertiliser companies, which are already dealing with a cash crunch, could face further liquidity pressures as they will have to shell out more Indian currency to purchase dollars. The appreciation of the dollar against other currencies is also affecting the value of the rupee.
While the rupee depreciation might benefit exporters, a weaker currency would further fuel inflationary pressures. As a result, dealers said, the central bank may intervene in the market over the next few days. “RBI is selling dollars, but the demand is so strong that it does not have much effect,” said a dealer with a large public sector bank.
With drying up of dollar supplies and continued strong demand from importers, dealers expect further weakening of the domestic currency. The rupee could trade around the 44.50-mark in the near term, with some large banks even suggesting 44.75.
Coupled with month-end pressures from oil companies, there is also a strong demand for dollars from other companies to finance their capital goods and other input purchases.
Moreover, inflows into the capital markets have nearly dried up. There have been net outflows of $1.7 billion in this month.
Rating agency Moody’s said the rupee has depreciated significantly against the dollar in recent months, down around 10 per cent since the start of the year.
“India’s currency weakness is largely due to capital flight from emerging markets. The liquidity squeeze in western economies has also led to repatriation of funds,” it added.
