Rupee touches record low as dollar flow dries up

The rupee touched a record low on Thursday but retreated on intervention by the Reserve Bank of India (RBI) even though the central bank is unlikely to stem the slide against the dollar as the greenback is rising rapidly against all currencies in the world.

The rupee may touch 70 a dollar or even break the level in the next few days, said most of the 10 currency experts polled by Business Standard on Thursday. But it would be wrong to assume that the rupee would be staying at those levels for long, they said. There could be technical correction and rupee may even strengthen from the present level. 

The rupee closed at 68.73 to a dollar after touching 68.865, in intra-day trades, a record low of August 28, 2013, when global markets were roiled by the US Federal Reserve’s “taper tantrum”. 

This time though, several factors have hit the rupee. Alongside a dollar rally, India has seen over Rs 22,000 crore flowing out from debt and equity markets in November so far. Besides, this month also saw $17-18 billion of outflows due to FCNR(B) deposits and redemption of $1 billion of foreign currency convertible bonds (FCCBs) triggered by falling stock prices.

“However good your macro fundamentals, if the dollar rises you will suffer. You will suffer less maybe, but you cannot escape it,” said Jayesh Mehta, head of treasury at Bank of America Merrill Lynch. The impact of demonetisation on the rupee is indirect and at best a hit on sentiment. On the contrary, the demonetisation drive, being deflationary in nature, can prop up the rupee in the medium term, said Satyajit Kanjilal, managing director of Forexserve.

According to Mecklai Financial CEO Jamal Mecklai, the negative impact of demonetisation has shaved off some credibility of the Reserve Bank of India and foreign investors won’t take it kindly. 

“If I have to put money now, I will have to be careful. We can push the button a little bit and say the rupee could reach 71-71.50 in the coming days if we do not receive enough support from the dollar,” said Jamal Mecklai, head of Mecklai Financial.

 

However, the depreciation of the rupee has not surprised everyone. It was on the offing for some time and was clearly reflected in the overseas non-deliverable forwards (NDF) market that are not regulated by the RBI.

“During our working hours in India, we don’t get to see much of a volatility because the RBI intervenes. However, the market is always open, taking cues from the overseas NDF market, and it has been showing sharp depreciation for the rupee for some time,” said Abhishek Goenka, head of IFA Global.

“By December, the rupee could weaken to around 69.50, from where it may pull back to 68 on a technical correction,” said Mohan Shenoi, head of treasury at Kotak Mahindra Bank.
 

The real effective exchange rate (REER) is inching up, indicating the rupee is strengthening against currencies of India’s trade competitors. In October the 36-currency REER was 117.12 against 116.35 in September and 116.44 in October 2015. In a six-currency basket, the REER was 127.65 in October against 124.72 a year ago. A REER value of 100 is normal, anything above it indicates overvaluation of rupee. 

“You need to depreciate to compete with China or South Korea that have let their currencies slide,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.

The collapse of the premium in the forwards market has prompted exporters to not sell their dollars. Banks, under obligation to honour FCNR-related dollar supply, are buying dollars in the spot market and selling them at a future date. The premium for future dollars has fallen but the cost of the spot dollar has shot up.

Currency dealers said companies had not hedged because the rupee had showed remarkable strength against its peers in the past 18 months. “There is a good amount of unhedged position. Now that will change,” said Samir Lodha, head of QuantArt Markets Solution.