Rupee touches 57 a dollar, FM steps in to calm nerves

Says inflows are strong and the currency is expected to stabilise going ahead

After the rupee weakened to 57 a dollar in early trade on Thursday, Finance Minister P Chidambaram tried to calm the nerves of currency market participants by saying the rupee’s depreciation in the past month was not a cause for alarm, as inflows continued to be strong and the currency was expected to stabilise going ahead.

The Indian currency has weakened more than 5.5 per cent against the dollar since the beginning of May. On Thursday, it breached the 57-a-dollar level — not very far from the record low of 57.33 hit intra-day on June 22 last year — before recovering a little, on selling by exporters, to close at 56.85 a dollar, down 0.2 per cent, or 13 paise, from its previous close.

“The rupee broke out of its three-month trading range and hit a low of 57 today, due to global risk-off sentiment, absence of large FII inflows and large dollar buying by oil companies, and defence-related payments,” said Hemal Doshi, chief currency strategist, Geojit Comtrade.

Treasury executives said the rupee might consolidate and stabilise in the near term. It might return to move in the band of 55-56 a dollar. But with the challenging macroeconomic environment, including high trade deficit and inflation, the rupee might continue to remain under pressure.

SBI Deputy MD (global markets) P Pradeep Kumar said the slide was driven by sentiment. It might go back to the 56 level. Concurring with his views, IDBI Bank Chief General Manager (treasury) N S Venkatesh said the rupee’s weakness was also because of the dollar’s strength. If the US’ non-farm jobs data remain weak, the Federal Reserve might continue with an easy monetary policy, he said.

Chidambaram said currencies of all countries with high current account deficit (CAD) were facing pressure.

“The strengthening of the dollar is impacting the currencies of countries with high CAD, such as South Africa, Brazil, Chile and Turkey. The rupee has depreciated but the flow has been strong, especially in April and May. So, it is not a cause for alarm,” he said on the sidelines of the annual general meeting of the Indian Banks’ Association.

The rupee’s recent weakness is due to global factors, as investors have been moving towards the dollar over concerns the US Fed might lower the pace of quantitative easing. Among domestic factors, there has been a strong dollar demand from oil companies, particularly the private refiners.

Some, especially exporters, stand to gain from the rupee’s fall. But a weak rupee might make overseas purchases costly. “Some of them may begin to sell foreign exchange to book gains,” Venkatesh added.

Ambit Capital’s head of equities, Saurabh Mukherjea, says: “The biggest impact will be on companies that have recently raised foreign funds. Because of the rupee’s depreciation, we could see their debt liability and payments going up. Also, further slide in the rupee will make it difficult for these companies to manage their finances.”

The importers of goods and services would end up paying more. Some companies have begun to take steps like price revision to protect themselves from the adverse effect of a weakening rupee.

Honda Cars India spokesperson said: “Honda has revised prices by up to Rs 14,000. Due to the rupee’s depreciation, we revised the prices of the CRV and top-selling Amaze from June 1, he said.

A JSW Steel official said: “The firm has hedging strategies in place. So, it won’t affect us much in the short term. But, if the rupee continues to depreciate, the coking coal imports would become expensive.”

However, some have a rather weak outlook for the currency. Essar Group India President (international finance) Prabal Banerjee, for example, says the economic parameters now are much weaker than a couple of years ago.

“These, naturally, have an impact on CAD, export performance and growth rate. All these impact exchange rate and, unless strategic reforms are undertaken to reverse this, the rupee’s slide cannot be arrested. I see rupee touching 58 to 60 by September-end.”

Persistent worries because of high gold imports and a rebound in global crude oil prices have worsened the country’s CAD. The Reserve Bank of India (RBI) has said steps are being taken to address the issue.

However, RBI has so far not been aggressive in the foreign exchange market to stem the rupee’s fall. According to analysts, since the present weakness is mainly due to global factors, intervention from RBI might not be of much help.

The finance minister admitted a weakening rupee added to import cost. “I agree it adds to the import cost. But the rupee will stabilise and will find its correct level,” he said.

He, however, added that the current account deficit in India remained a cause for concern. “Like we were able to fully finance it last year, without drawing down reserves, I hope, with encouraging foreign investments, we will be able to finance the deficit without drawing on our forex reserves this year, too” he said.

Chidambaram also raised concern over a rising gold demand and urged banks not to encourage their customers to buy gold. “How can we finance these gold imports? Both RBI and the government have no option but to take stronger measures. RBI announced some measures a couple of days ago and, yesterday, the government obliged once again to increase the import duty on gold.”