The bearish trend in the domestic stock market and the arbitrage opportunity between the domestic and the overseas markets resulted the rupee breaching the 50-mark against the US dollar for the first time in over two months.
While the rupee opened marginally weaker at 49.70 against yesterday’s close of 49.67 against the greenback, it fell to a low of 50.07 in the afternoon. This was the lowest level since December 12, according to Bloomberg data.
Later in the day, the rupee recovered a little due to the Reserve Bank of India’s intervention and the sale of dollars by some corporate houses to close at 49.98, the lowest closing level in 2009.
Most currencies fell against the US dollar as the unrest in global markets shook sentiments. Among the Asian currencies, the Taiwanese dollar hit a five-year low against the dollar, while the South Korean won fell to its lowest level in two months and the Malaysian ringgit declined to the lowest since November 2006.
While the rupee’s fall was triggered by the bearish sentiment in the stock markets, the arbitrage in the offshore non-deliverable forwards put pressure on spot rates. According to NewsWire 18 data, the one-month NDF rate was 50.32 per dollar, which created an arbitrage opportunity between onshore and offshore markets.
| DRIVING THE RUPEE |
| * With the rupee going beyond the 50 mark against the US dollar, RBI is once again active in the market. Between April and December 2008, it sold dollars worth $31.74 bn to prop up the Indian currency. In contrast during April-December 2007, RBI purchased dollars worth $57.89 bn to check a steep appreciation of the rupee in the wake of high inflows from foreign institutional investors. |
| *While RBI stepped up dollar sales in October 2008, when the rupee touched a low of 49.98 against the greenback, its role was limited in December, when the Indian currency was around 46.95-50.29. The impact is also showing on the foreign exchange reserves which have fallen $58.19 bn during the current financial year to $251.53 bn as on February 6. |
“There is no demand whatsoever for dollars, it is a pure case of arbitrage that has impacted the Indian currency. There is little import of gold and jewellery, there is no demand from the oil refineries and there are no major forex loan repayments happening. So, banks bought dollars to sell in the offshore non-deliverable forwards market in order to make an immediate gain without any risk,” a dealer with a foreign bank said.
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Non-deliverable contracts are settled in dollars rather than the local currency. Forwards are agreements in which assets are bought and sold at current prices for future delivery.
What also affected the sentiment was the fear of a rating downgrade due to the high fiscal deficit and slowdown in deposit mobilisation by banks, which could put pressure on the Indian currency.
“In the case of a downgrade, there might be some pull out by foreign institutional investors. Similarly the bearish sentiment in the domestic stock market is also affecting the rupee’s movement,” said IndusInd Bank Executive Vice-President J Moses Harding.
Dealers expect the trend to continue as RBI’s intervention had a little effect during the day. The central bank is said to have sold $200-250 million worth of greenback through public sector banks but there was little demand in the market with volumes being low.
In the futures market, the one-month rupee-dollar contracts rose on the National Stock Exchange and MCX as traders bought the greenback noting its rise against most global units, dealers said. On NSE, one-month contract ended at 50.0050 against the dollar, as against 49.6800 yesterday. On MCX, one-month contract closed at 50.0100, compared with 49.6850 yesterday.
“On the positive side there could be some NRI flows coming into the system as 50 per dollar is a good level for them. But by and large this trend is set to continue for the next 10-15 days,” Harding said.