The rupee on Tuesday breached the 50-mark against the dollar after nearly six weeks, closing at 50.37, compared with yesterday’s close of 49.84, owing to equity markets weakening after the election results of five states. The results made investors worry about economic reforms.
The strengthening of the dollar against major currencies due to concern over the slowing economic growth in China and Europe and the risk of Greece failing to complete a debt restructuring deal were also seen reasons for the fall in the currency.
Anjan Barua, deputy managing director (global markets), State Bank of India, said the rupee had breached the psychological 50-mark, primarily due to global factors like the fall in the value of gold. “There is demand for the greenback to buy gold, the prices of which dipped by $100 in the last few days,” he said.
A dealer with a large private bank said due to the debt woes in Europe, risk aversion had returned. “High crude prices continue to hurt the rupee. The trade deficit, which was $14.8 billion in January, is also impacting sentiment,” he said.
Dealers said the Reserve Bank of India (RBI) did not intervene in the market on Tuesday to stem the rupee’s depreciation.
According to analysts, since the outcome of the state elections were not in favour of the Union government, it may prompt the announcement of a populist Budget on March 16, and this may worsen the country’s fiscal position and hurt foreign fund flow into the country. The Bombay Stock Exchange’s benchmark Sensex fell more than one per cent on Tuesday.
In a research note, Standard Chartered Bank said, “The pace of policy reforms is unlikely to get a fillip from the state election results. Investors would probably pin their hopes on the Budget. If the government fails to take difficult decisions because of political reasons, we see near-term risks to flows into India.”
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From here, the rupee’s movement against the dollar would hinge on oil and gold prices in global markets, Barua said. Dealers said it would also depend on RBI’s stance on intervention. The central bank has been stepping in the currency market to arrest the rupee’s rapid fall.
In December, the central bank sold more than $9 billion in the spot and forwards markets, its biggest intervention in nearly three and half years, according to data released by RBI in February. Apart from intervention, the central bank also announced a slew of measures like freeing foreign currency deposit rates, which helped the rupee change its trajectory since the beginning of 2012, after declining 18 per cent in 2011.