Rupee breaches 50/$, RBI intervention seen

The rupee on Friday breached the 50 a dollar mark after two and a half years as traders sought shelter in the safe haven currency ahead of a crucial European Union summit on Sunday. Dealers expect the meeting to decide on the region’s bailout package to be inconclusive.

The Indian currency was the worst performer amongst its Asian peers today as it lost 0.5 per cent against the dollar from its previous close. On Friday, the rupee settled at 50.03, thereby registering a weekly loss of two per cent, or Rs 1 against the greenback. Market participants said the central bank intervened to manage volatility when the rupee touched 50.30 levels in afternoon trade. The step helped stabilise the market and pull the foreign exchange rate back to the 50 level.

Last week, Reserve Bank of India (RBI) governor D Subbarao had said “the rupee fall certainly had an adverse impact on the cost of our imports, especially the cost of oil. It comes at a particularly difficult time when inflation is also high.” A forex dealer at a domestic brokerage said debt payments to foreign institutional investors by Indian companies coupled with importers’ hedging requirements led to an increase in dollar demand today. Also, foreign banks were the most aggressive buyers of the greenback. “The speed at which the rupee fell was surprising even as other asset classes were relatively stable," said Moses Harding, head of the global markets group at IndusInd Bank.

In addition, investors preferred to stack up dollars on fears the EU meeting scheduled to decide on the bailout plan may be inconclusive. Deep divisions between France and Germany mean they will make scant progress on strengthening the euro zone bailout in a sign that Europe’s leaders are still some way from getting a grip on the bloc’s debt crisis.

An agency report quoted a communiqué from French president Nicolas Sarkozy and German chancellor Angela Merkel as saying that a wide-ranging plan to solve the sovereign debt crisis would be announced no later than Wednesday, though the region’s leaders would meet on Sunday. Germany and France are the top two contributors of the ¤440-billion European Financial Stability Fund, created to provide financial assistance to member countries.

The euro was at $1.3808 at the end of rupee trade, higher from $1.3789 on Thursday.

Exporters also said the rupee depreciation may not be of much help as business sentiments were weak. While importers scurried to take cover for unhedged positions, the rupee fall has comforted exporters still holding on to the dollar. “A day’s rupee-dollar movement will not decide the actual impact. We will have to see the average rate of the rupee at the end of the quarter,” said Rostow Ravanan, CFO, MindTree.

Premal Udani, chairman of Apparel Export Promotion Council, said, “Normally, every depreciation in the rupee benefits Indian apparel exporters. But, we would not be able to take advantage this time due to the weak business sentiment globally. There has been virtually no business with developed nations today. Hence, this will be a lost opportunity for us.”

A report from HDFC Bank said it expected the rupee to remain under pressure for some time as risk aversion would likely ensure portfolio flows remained weak. “Concerns about the European banking sector could result in some degree of tightening in European money markets, which might make rolling over of short-term debt that much difficult,” the report said.