India Inc’s demand for dollars is likely to keep the rupee weak against the greenback in the near term.
"Indian companies fear a credit freeze in advanced nations, and this could impair their ability to raise debt or roll it over. The need to ensure smooth repayment of debt has led to the rush for dollars, and has hastened the fall of the rupee," rating agency Crisil said in a statement on Monday.
Domestic firms have been borrowing funds from foreign markets through external commercial borrowings and foreign currency convertible bonds (in the past few months, since domestic interest rates continue to remain high.
According to recent data released by the Reserve Bank of India (RBI), foreign borrowings by Indian companies touched $4 billion in July 2011, compared with $1.1 billion a year ago. Crisil said most of these foreign borrowings have turned short-term in nature, and this has prompted Indian companies to raise fresh dollar loans to repay existing debts.
"In fact, a large part of these borrowings are due for repayment in 2011-12. Rather than capital outflows, repayment pressures on corporate India seem to be responsible for the sharp weakening of the rupee," Crisil said.
According to the rating agency, India Inc accounts for nearly 90 per cent of $88 billion short-term debt due for repayment this financial year. Besides the dollar borrowings, the flight to safety in a period of economic uncertainty has also raised the demand for dollars.
The rupee plunged to its 28-month low in last week’s trade, depreciating to 49.9 levels. On Thursday, it fell 2.5 per cent, its biggest single-day drop in 15 years, Bloomberg data showed. The currency is one of the worst-performing ones among the 10 most traded Asian currencies.
Standard Chartered Bank has lowered its short-term foreign exchange rating on rupee to ‘neutral’. It expects the currency to touch Rs 51 per dollar by the end of December.
RBI has not intervened in the foreign exchange market for eight months up to July. However, with the rupee touching a 28-month low, traders said the central bank has been selling dollars to support the local currency. "In addition to global developments, the central bank’s intervention is an important swing factor for the dollar-rupee exchange in the near future. The risks of significant intervention have increased in the wake of a sharp increase in volatility over the last few days," Standard Chartered Bank said.
The banking regulator, however, has said it would continue with its stance of intervening in the foreign exchange market, if only to ease the excessive volatility.
"It is important for people to recognise that volatility in the exchange rate is a part of the game now, and your calculations of investment or returns have to take that into account. You have to decide how you are going to hedge that risk. We, at this point, do not see any intervention from a rate-targeting view point," RBI Deputy Governor, Subir Gokarn, said last week.
