But weak markets and global pressure will continue to weigh on currency, says Street
The rupee bounced back from the day's low on Monday, buoyed by dollar sales from some local companies. However, weakness in local equities, along with strong demand for the dollar due to worries that North Korean leader Kim Jong-il’s death could spark political instability in the region, kept the local currency on the edge, traders said.
The rupee closed at 52.88/90 to the dollar, 0.3 per cent weaker than its 52.70/72 close on Friday, after moving in a wide 52.72-53.23 band during the day, according to Clearing Corporation of India data. The rupee has weakened 18.3 per cent since the beginning of 2011. Traders said although Reserve Bank of India (RBI) action could have lowered speculation, the turnover in the dollar-rupee market had dropped sharply since then and lowered the price-making ability of banks for customers.
“The market has kind of dried up after the RBI's measures and the quotes too seem wider,” said a dealer with a foreign bank.
“There is some calm returning to the market post the Reserve Bank of India’s steps on trading limits last week,” said Uday Bhatt, senior manager of dealing at UCO Bank.
In addition, there was a strong market buzz the government may hike the ceiling on the interest rate for External Commercial Borrowings (ECBs) to 900 basis points from the existing 500 bps above LIBOR.
Also, reports suggested there could be moves to ease end-use conditions for funds raised through ECBs. The government would take a final decision after consultation with the RBI. In the last week, when the rupee fell to a record low of 54.30 on Thursday, the RBI took a series of steps to improve supply and curb speculation in the dollar.
| THE ACTION SO FAR |
| DECEMBER 15 Rupee hits record low of 54.30/$ |
| DECEMBER 15 RBI decides to crack down on speculation by: * Barring residents and foreign institutions from rebooking forward contacts * Cutting overnight open positions banks keep * Mandating forward contract booking on full-delivery basis |
| DECEMBER 16 The central bank acts to improve dollar supply by removing interest rate ceiling on NRI deposits |
| DECEMBER 19 MFIs allowed to raise up to $10 million via ECBs through automatic route |
Reduced the net overnight open position limit or trading limit of banks to cut speculation in the domestic currency market. It also withdrew the facility to rebook forward contracts, involving the rupee as one of the currencies, once cancelled by residents and foreign institutional investors.
On Friday, as a step to increase the inflow of dollars from non-resident Indians, it scrapped the ceiling on NRI and NRE deposits. Some banks have already started reacting. Federal Bank today increased the interest rate on NRE deposits of one-year maturity from 3.82 per cent to 6.5 per cent. The bank said the offer was valid till December 31, 2011. South Indian Bank increased deposit rates to provide 6.75 per cent across maturities from one to 10 years.
However, dealers and bankers say it is too early to say the rupee will stabilise at the present levels. In addition to capital outflows from FIIs, the euro zone crisis will have a bearing on the rupee's value.
Anjan Barua, deputy managing director and head of global markets group with State Bank of India, said, “The RBI action has had its effect. The trend of a sharp drop in the rupee has been cut. But, one will have to monitor it for another 10 days before commenting whether it is stabilising.”
Many feel the rebound may be difficult to sustain in the face of a sombre mood in the stock market, weak economic fundamentals and global pressures. Also, the month-end demand for dollars from importers would also weigh on the rupee. However, most dealers agree that as a result of the recent measures, the RBI is now in a better position to stabilise any sharp volatility in the local currency.
The relatively small size of its kitty of foreign currency reserves, compared with some other Asian economies, and a widening trade deficit mean the RBI needs to calibrate moves in the foreign exchange market carefully.
The BSE Sensex fell 0.72 per cent on Monday to its lowest close since August 2009, as investors continued last week's sell-off on mounting concerns over slowing growth in Asia's third-largest economy.
The one-month onshore forward dollar premium was at 37.5 points, up from 32.5 on Friday, and the three-month premium was at 98 points, up from 89.
