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Fresh capital outflows and sustained dollar demands from importers pushed the rupee again to close at above 60 levels against the dollar. The Reserve Bank of India’s (RBI) intervention in late trading session stemmed further slide of the Indian currency.
On Wednesday, the rupee depreciated by 55 paise to close at 60.22 over Tuesday’s closing of 59.66, according to Bloomberg data.
Treasury executives said besides domestic factors such as dip in capital market and dollar demand, global factors also weighed on rupee-dollar dynamics.
This is the third time in a span of 10 days that the rupee closed above 60. It breached the psychological mark of 60 against the dollar for the first time on June 26, when it closed at 60.73. It closed at 60.20 on June 27.
RBI was seen in action at the fag end, basically to contain volatility. Foreign banks and exporters also sold dollars, partly arresting the slide of the rupee.
On Wednesday, the global markets panicked on the back of multiple reasons including slowing Chinese growth and political tension in Portugal.
Heavy dollar buying by importers, mainly oil refiners, following sharp rise in global crude oil prices weighed on the rupee. Brent oil hit the one-week high of $105 a barrel.
According to the head of treasury with a large public sector bank, the rupee depreciated as dollar strengthened against all major currencies.
A weaker local currency can add to inflationary pressures, widen the fiscal deficit and slow capital inflows.
Meanwhile, the Indian benchmark S&P Sensex on Wednesday slumped by over 286 points, while foreign institutional investors sold shares worth Rs 705 crore according to the provisional data with stock exchanges.
The dollar index was down by about 0.20 per cent against a basket of six major currencies.
With weak economic environment, the rupee is expected to continue to remain under pressure.
However, along with market intervention, announcement of new measures by RBI may help calm the volatility on the rupee front.
The central bank has proposed incremental provisioning and capital requirements for banks’ exposure to companies having un-hedged forex exposure.
This step may aid banks to ward off any possibility of default by them.
The country’s current account deficit (CAD) reached a record high of 4.8 per cent of GDP in FY13 and a weak rupee would inflate the value of imports, adding pressure to CAD.
