The rupee hit a fresh low again on Wednesday, as global headwinds continued to hammer the fundamentally weak currency amid a minor intervention by the central bank. According to market participants, the rupee may depreciate to 58 a dollar in the absence of strong measures from the government and the Reserve Bank of India (RBI).
On Wednesday, the rupee closed at 56.01 against the dollar, having hit a fresh all-time low of 56.22 during the day. It depreciated 60 paise or one per cent as compared to the previous close. This is the sixth consecutive session where the rupee has registered a record low. Dealers said the RBI may have sold $100-250 million on Wednesday in its first intervention in three sessions. But, the amount was too small to stem the rupee’s fall.
Finance Minister Pranab Mukherjee discussed the rupee situation with RBI Governor D Subbarao in a video conference on Wednesday, officials said. Market participants expect the currency to depreciate further and stabilise around the 58-a-dollar levels.
“Fundamentally, the upside to the dollar-rupee from here depends on the strength of future RBI and government measures and global factors. Cheap valuations and lower oil prices are two silver linings that could push the dollar-rupee pair towards our quarter-end target of 54, if there is a positive surprise on the policy or global front. For now, however, upside risks dominate,” said Priyanka Kishore, FX strategist, Standard Chartered Bank. She added the dollar-rupee pair may stabilise at 57.32-58.62 levels.
Since the end of April, the rupee has depreciated 6.2 per cent against the dollar and more than 13 per cent from its 2012 peak in February.
FIIs (foreign institutional investors) have pulled out from the Indian equity markets in the past week, with the Sensex closing 0.5 per cent down from the previous close to end at 15,948.1 on Wednesday. According to Bombay Stock Exchange data, there were foreign fund outflows of about Rs 360 crore from the Indian equity markets on Wednesday.
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Global risk-aversion, mainly due to the sovereign debt crisis of the euro zone, has widened the current account gap of India. It reached 4.3 per cent of GDP in the quarter ended December.
Dollar inflows from the Exchange Earners Foreign Currency (EEFC) accounts and intervention from the RBI were not sufficient to beat consistent dollar buying by oil marketing companies and demand from foreign banks and FIIs.
According to an RBI directive, May 24 is the deadline for EEFC account holders to convert half of their dollar holdings into rupees.
“In this volatile market, no traders are giving two-way quotations. There are hardly any market makers left. Even banks are covering back-to-back as per deals and not taking positions,” said a forex dealer with a domestic consultancy firm. The dealer added the market no longer expected the RBI’s intervention to turn the currency’s fate.
A weaker euro ahead of a European Union summit added to the rupee's woes. The euro was trading at a 21-month low of 1.2615 a dollar on Wednesday as against 1.2684 a day ago. Increasing risk-aversion across the globe led to the dollar index strengthening to 81.69 levels from 81.49 in a day.
“Pessimism towards the rupee has increased significantly following the breach of the previous all-time low of 54.30 against the dollar and the currency touching new lows every day,” said Kishore of Standard Chartered Bank. Pramit Brahmbhatt, CEO of Alpari Financial Services, also expects the rupee to depreciate further. “The rupee, which has witnessed a gradual rise in its trading range from 48-52 levels in 2011, is expected to extend both the lower and the upper caps to 52-58 in the present scenario,” Brahmbhatt said in a report.
However, steps like dollar bond issuances and a special window to meet the requirements of oil marketing companies are still expected by the markets. Moses Harding, head, economic and market research, IndusInd Bank, said, “It is matter of time before we hear of a large bond issuance to see a sustainable correction to 54 a dollar.”
India's foreign exchange reserves total nearly $292 billion, enough for roughly six months of imports, down from $320 billion in October. The RBI sold a little more than $20 billion in the spot market between September and March, latest data show.