Rupee hits all-time low as RBI struggles to stem fall

Easing rates might prompt more liquidity squeeze measures

The rupee on Friday hit a record low, depreciating 1.08 per cent to close at 61.10 against the dollar as compared to Thursday’s closing of 60.40 a dollar.

The rupee came within striking distance of touching the all-time intraday low on Friday of 61.21 of July 8. The Reserve Bank of India (RBI)’s intervention via banks might have curbed further fall, dealers said. RBI has been cautious in its intervention as the country’s foreign exchange reserves can cover imports for six to seven months only. RBI deputy governor Urjit Patel, however, sees the  reserves as adequate, as seen from his comments a couple of days earlier.

The rupee’s weakness comes ahead of the US non-farm payroll data, which would shape the currency’s fate next week. Any improvement in the job loss data would be seen as an indication for the US Federal Reserve to taper its asset buying programme, popularly known as Quantitative Easing 3. A high current account deficit (CAD) and the pullout of foreign investors from emerging markets on the hope of a recovery in the US has put pressure on the rupee, which has depreciated 12.5 per cent this financial year.

The CAD had touched a record high of 4.8 per cent of gross domestic product last financial year, which has prompted the government to announce several reform measures to attract inflows of a durable nature.

The central bank has taken several steps in the past few weeks to squeeze liquidity in the banking system to make the rupee expensive and cut speculation. On Thursday, RBI mandated foreign institutional investors would require a mandate from a participatory note or foreign derivative instrument holders to hedge on their behalf – a move seen to clamp down on speculative activities in the currency derivative trade. Despite all these, the rupee on Friday slipped below pre-July 15 levels when the central bank started the liquidity tightening measures. These measures include capping banks’ borrowing from the liquidity adjustment facility and increasing the marginal standing facility rate by 200 bps to 10.25 per cent.

  Still, liquidity in the banking system is comfortable, as government spending has started. As a result, the overnight rates closed at seven-7.5 per cent levels after touching the day’s low of five per cent. On Wednesday, Subbarao had said there could be open market sales of government bonds in the future, as they are a part of the package of tightening. According to currency dealers the rupee is expected to hit a fresh all-time low next week as importers are concerned and might keep buying dollars. The rupee is expected to trade in the range of 60.50-61.50 a dollar next week, they said. Dealers also said RBI might have to intervene heavily to strengthen the rupee.