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The rupee’s slide against the dollar was partially fuelled by extensive sale of debt paper by foreign institutional investors (FIIs), for over two weeks.
FIIs are significant investors in government bonds and they have been net sellers since May 22. The cumulative sells (net) by FIIs during this period amounted to $2.1 billion, according to Securities and Exchange Board of India data.
The rupee today hit a record low of 58.14 against the dollar. It has lost almost three per cent since the beginning of this month. Treasury executives with banks say the fall reflects importers’ demand. Views on the fragile macro economic situation, along with sales by FII’s, add to the forex volatility.
On the dollar side, market sentiment in America shows signs of improvement, giving rise to prospects of an early reversal of quantitative easing. That is, of central banks gradually scaling down steps to pump liquidity into the market, indicating confidence in economic recovery.
Such indications also prompted some foreign investors in the Indian debt market to take money back to the developed markets. This led to a demand for dollars from their custodian banks in the domestic currency market. The latter market is shallow and any spurt in demand for hard currency weighs on exchange rates, bankers said.
A treasury head with the Indian arm of a European bank said, “The fall in the rupee has been too quick. These debt market players (FIIs) would have already hedged their foreign exchange exposures.” Yet, when they place orders, their banks purchase these on the spot (market).
“There is apprehension that dollar-rupee volatility is eroding the gains for FIIs who have invested significantly in government bonds. So, they are partly pulling out, before their gains evaporate,” said the head of treasury of a large public sector bank.
