Rupee Rides A Roller-Coaster

Rupee loses 64 paise to touch 37.52 Rupee value has bottomed out, says RBI governor

The rupee depreciated sharply by 64 paise to touch 37.52 against the dollar yesterday, but hardened later to close at 37.42 after the Reserve Bank sold $200 million and RBI governor C Rangarajan issued a statement indicating that the rupees value had bottomed out.

With the current fall, the rupee has depreciated 4.82 per cent since August 19, when its fall commenced from 35.70. The rupee was then declared to be overvalued by 14 per cent.

In his statement, Rangarajan warned that any further fall in the value of the Indian currency would trigger strong intervention. While the Reserve Bank has been ensuring that there is no undue volatility and that there are orderly conditions in the market, the rupee has been adjusting to the changing circumstances, he said.

 

We believe that the adjustment that has already taken place in the value of the rupee is adequate. In view of the fundamentals, there is no further ground for a further weakening of the rupee. The Reserve Bank will not hesitate to intervene to prevent any overshooting, he added.

The market has assigned a lot of weight to the governors statement as it indicates the RBIs wish to soft-land the rupee to realistic levels. It also indicates a level below which the RBI may not be willing to let the rupee depreciate for now.

However, forex dealers warned that strong intervention would be needed to back up the governors statement, as corporate treasury rooms have been gripped by panic.

The rupees intra-day depreciation was 1.33 per cent in a market characterised by sustained corporate demand, low volume, and high volatility.

The Reserve Banks statement indicating its resolve to prevent an overshoot of the exchange rate, as well as outright dollar sales estimated at $200 million, provided only temporary respite for the rupee. With yesterdays intervention, the Reserve Bank has pumped in over $1.2 billion to soft-land the rupee to 37.52.

Although the rupee recovered to 37.25 on intervention, sustained corporate buying saw it slip down to close at 37.39-42, against Mondays close of 36.875-885.

Forward premia, however, softened after the RBIs intervention in the spot market. The RBI made enquiries in the forward market, although it did not sell dollars. This resulted in forward premia closing at 7.14% for six months and 6.94% for 12 months, against Mondays close of 7.31 and 7.12% for six months and 12 months respectively.

According to a treasury head, Inter-bank trading volumes were not that high. However, with the demand from corporates being quite good, the rupee reacted sharply. This indicates apprehension spreading to corporates.

A corporate dealer with a foreign bank said, The depreciation had to happen. The market has just been waiting for it to happen.

The rupee should be in the region of 37.10 to 37.50 over the next few days. Verbal intervention by the RBI will not be sufficient to prop up the rupee. Instead, they have to be in the market in a very active way, said ANZ Grindlays Bank treasury chief Arvind Sethi.

Reuter adds: They (the RBI) really hammered the market at 37.50. So, I think this should hold for some time. We are looking at 37.50 holding until March end, said Shekhar Sathe, senior vice-president, Kotak Mahindra Capi-tal Company. Earlier in the day, corporates rushed to buy dollars and banks began speculating against the rupee while the RBI held to the sidelines.

Corporates are panicking and with the RBI keeping away, it has become a one-way market, said a dealer at a private bank at the height of the action.

The market is slightly comforted now after the governors statement that the Reserve Bank of India will not hesitate to intervene to prevent any overshooting of the rupee, said N S Paramasivam, head of foreign exchange at the Essar group.