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Rupee continued its slide against the US dollar (USD) on Tuesday and hit an all-time low of 61.4 in morning deals, breaching its previous record of 61.21 last seen on July 8. The INR has slipped around 9.6% this year, making it the weakest emerging market currency in Asia against the dollar.
The slide sent equity markets into a tizzy after a quiet start, with the S&P BSE Sensex and the CNX Nifty slipping 1.1% and 1.3% to 18,970 and 5,613 levels, respectively. Among sectoral indices, the S&P BSE Consumer Durables index, Capital Goods index and the Metal index were among the worst hit.
The banking index, the Bankex, also shed 3%. While Union Bank of India and Canara Bank slipped over 5% each, YES Bank, Bank of India, IndusInd Bank, Federal Bank and Kotak Mahindra Bank skidded between 3.5 – 5% each.
“There was some dollar demand in the morning due to which the rupee has seen a sharp slide,” said N S Venkatesh, chief general manager & head - Treasury at IDBI Bank.
Explains Sonal Varma, an economist at Nomura: “The economic data from the US has been strong. Last week, the ISM numbers were good and yesterday the non-manufacturing numbers were good. This reinforces the view that QE tapering is in pace. On the domestic front, the markets have been waiting for an announcement from the government to tackle the BoP issue – both on the export, import front and on the capital account side. Those keenly-awaited measures have not yet come in. All this put together has been impacting the rupee.”
Outlook
Analysts say that is very difficult to take a long-term call on where the currency is headed as it has become very vulnerable to the heightened imbalances in the balance of payment (BoP) account. Though grapevine suggests that the INR can go well above 65 against the USD, technical chartists expect the currency to weaken further.
“We have seen a break out in today’s session and I would expect the rupee to slide to 62.5 – 63 levels over the next three – five sessions. This is assuming that the RBI does not come out with a hike in the cash reserve ratio (CRR) or the repo rate,” said Shardul Kulkarni, head for technical Research at Angel Broking.
Nischal Maheshwari, co-head of institutional equities & head research expects, however, expects the rupee to remain range-bound between 58 - 60 levels in the current financial year.
“The dollar demand continues to remain strong in the domestic market. However, we see a likelihood of RBI intervention in forex market through more liquidity draining measures. We recommend going short in USDINR pair at the levels of 61.45-50 for a target of 60.80 in August Futures in near-term,” suggests a Nirmal Bang report.
“Whenever, the rupee has seen a sharp decline, it has been unable to recover to its earlier position. The RBI is not targeting any specific rate. Unless the CAD (current account deficit) print improves on a sustainable basis, we will not see any real improvement in the currency. I fear persistence of downward bias,” says Rupa Rege Nitsure, chief economist, Bank of Baroda.
Varma of Nomura points out that the growth in India is weak and if the central bank continues to curtail volatility by tightening the short-end liquidity, it will then significantly raise the short-end funding costs at a time when domestic demand is already very weak.
“There are asset quality concerns for banks and with the liquidity tightening measures, there would be further concerns on asset quality. In addition, we have a risk of flows reversing and the investment pipeline is quite dry amid weakening consumer demand. With the RBI trying to reduce volatility in currency through interest rate defence is going to hit growth further and can create more concerns on asset quality, which in turn is bad for growth outlook,” she adds.
