)
The rupee on Wednesday breached the formidable barrier of 60 a dollar to slump to a record low, despite the Reserve Bank of India’s efforts to support the currency.
Currency dealers attributed on Wednesday’s decline to large demand for dollars from public sector oil companies, which usually pay their import bills at month-end. They added foreign investors had also been selling Indian debt.
The rupee, which on Wednesday fell 1.76 per cent from its previous close of 59.68 a dollar, touched 60.77 in intra-day trade before closing at 60.73 a dollar. It had opened at 59.74 and touched a high of 59.73 during the day.
The government’s inability to rein in the wide current account deficit, amid declining foreign exchange reserves (RBI’s currency reserves of around $291 billion could serve as import cover for only seven months), has led to a drop of 11 per cent in the rupee’s value since May, making it the worst-performing Asian currency against the dollar.
A weaker rupee will not only stoke inflation but also make narrowing the fiscal and current account deficits more difficult. An increased volatility will also slow down capital inflows for the country.
The rupee’s fall had a rub-off on stocks, too. The Bombay Stock Exchange’s Sensex reversed the day’s gains to slide 0.4 per cent in the last 30 minutes of trade to close at 18,552.12.
“The rupee was consolidating in the 59.40-59.80 range in the past couple of sessions. If the market sustains above 60 a dollar on a closing basis, there is a possibility that it might hit the next technical key level of 61,” said India Forex Advisors CEO Abhishek Goenka.
He added India’s huge outflows from the debt market in the current month were putting severe pressure on the rupee. The key reason behind the massive outflows was the fading arbitrage opportunity for foreign investors.
Ambit Investment Advisors CEO Andrew Holland suggested the currency’s depreciation and the state of the markets would be a negative for flows. “Money coming into India has been through allocations towards the emerging markets basket... When markets are where they are, people may not do much. People will worry about how much more currency depreciation one could see,” he said.
According to some currency dealers, state-run banks sold dollars on RBI’s behalf, but the intervention did not help much.
“The fact that the currency has crossed the psychological 60-a-dollar mark shows that the situation might not be under the central bank’s control. The rupee’s movement might rather be driven by global developments and their impact on the Indian economy,” said Reena Rohit, chief manager (non-agri commodities & currencies), Angel Commodities Broking.
Many currency dealers, however, say that the government and RBI should now come up with more concrete steps to arrest the rupee’s fall.
The weakening rupee is set to push the inflation rate higher. “We assume that 30-40 per cent of the rise in import costs due to the rupee’s weakness will be passed on. That will result in a 70-basis-point increase in the rate of Wholesale Price Index (WPI)-based inflation. We have previously argued that a sustained 10 per cent rupee depreciation adds 150-200 basis points to headline WPI inflation, as increased import costs get passed on to consumers,” said Standard Chartered Bank’s Samiran Chakraborty and Anubhuti Sahay in a note to clients.
