Measures to offer short-term relief

Steps taken by the Reserve Bank of India (RBI) to augment dollar inflows would ease the pressure on the rupee’s exchange rate, and the currency is unlikely to fall to fresh lows soon. However, developments in the euro zone, the strengthening dollar and global risk aversion may add to weak fundamentals like the widening current account deficit and a policy paralysis.

A snap poll conducted by Business Standard shows the market sees the next support level of the rupee at 54.30 a dollar, the rupee’s all-time low as on December 15, 2011. Over the medium term, the rupee is seen depreciating to as low as 56 against the dollar.

“RBI’s intervention would only bring temporary correction, until fundamental issues are addressed. Otherwise, the rupee may continue to decline gradually,” said Moses Harding, head, economic & market research, IndusInd Bank.

On Thursday, the rupee appreciated 40 paise, or 0.7 per cent, to close at 53.43 against the dollar, owing to steps taken by RBI. The central bank has asked exporters to convert 50 per cent of their dollar holdings in exchange earner’s foreign currency (EEFC) accounts into rupees within 15 days.

Also, the intra-day open position limit for banks has been set at five times the net overnight open position limits or the current intra-day position limit approved by RBI, whichever is higher. The move followed the rupee closing at an all-time low of 53.83 against the dollar yesterday.

These measures are expected to bring $2.5 billion of dollar flows into the foreign exchange market and prevent the rupee from falling to new lows in the short term.

Respondents to the survey said developments in the euro zone and weak foreign institutional inflows posed downward risks to the rupee’s exchange rate. The underlying issues of widening current account deficit and weak foreign institutional inflows would make the currency more vulnerable to global risk aversion.

On the upside, the fall in crude oil prices, RBI’s intervention and deregulation of domestic fuel prices may help the rupee sustain its current levels. Ajay Marwaha, executive vice-president and head of trading, HDFC Bank, said, “The rupee is reasonably undervalued right now, and it is expected the central bank would protect these levels.”

WHAT THEY SAY
	Outlook

Support Level

Risks

Positives

Piyush Garg, chief   
investment officer,
ICICI Securities5654Policy paralysis, 
widening CADHike in fuel prices,
decline in global 
crude oil prices,
weaker dollar TS Srinivasan, general 
manager (treasury),
Indian Overseas Bank5654-54.15Widening CAD, 
limited forex
reservesRBI’s measures to  augment dollar
inflows Abhishek Goenka, CEO, 
Indian Forex Advisors52 - 55 52.80 - 54Weakening Euro, 
widening CAD,
FII outflowsRBI’s measures   
to help rupee in
short term Moses Hardings, head 
(economic &
market research),
IndusInd Bank52-5752.8Bullish dollar, 
weak stock
marketsRespite in global  
crude oil prices,
Need to address
fundamental
issues for long
term relief Ajay Marwaha, executive 
vice-president and 
head of trading, HDFC Bank54-5552-54.50Euro zone crisis Fall in global 
crude oil prices Priyanka Kishore,
FX strategist, 
Standard Chartered Bankno view52.50-54.31Developments 
in euro zoneRBI intervention,  
measures Nirmal Bang51.551.50-54.00Rising CAD, 
weak inflowsRBI’s measures

“Looking at the US economy, the dollar is also expected to weaken. It could add some cushion to the rupee’s depreciation. RBI’s strong intervention on interest differential would work, too,” said V Suresh, chief financial officer at Essar Power.