Re hits 6-month low; FIIs inflows may slow

The rupee fell to a six-month low of 40.72 against the dollar as losses in stocks raised speculation that global funds will reduce their local share holdings.

While the news of Bear Stearns sale and US Fed's emergency rate cut saw the rupee fall to 40.84, the weakest since September 2007, it appreciated later.

With Monday's movement, the rupee has depreciated 3.76 per cent since a high of 39.29 on January 10. This comes against an appreciation of nearly 9 per cent seen during 2007.

The fall has been steepest against the yen with the rupee-yen value depreciating almost 19 per cent from 35.29 in the beginning of the 2008 to 41.90 now. Similarly, it has slipped 12 per cent against the euro.

The depreciation against other major currencies was more acute than the dollar since all other currencies have appreciated against the greenback.

Yen is at a 12-year high against the dollar at 96 and the euro too is at a record high against dollar at 1.5758.

In the domestic market, the rupee is depreciating against the US currency. So, there is double depreciation on a cross-currency basis. According to a banking analyst, the primary reason for the rupee to depreciate is lack of fresh FII inflows unlike last year.

Following the global equity market turmoil, most FIIs booked profits in the Indian equity markets since January 2008.

The Securities and Exchange Board of India (Sebi) data showed that between January and now, FIIs have sold equity worth $32.70 billion (Rs 13,991 crore).

On the other hand, exporters, following a sharp appreciation of the rupee, had booked their dollar receivables at 39.50, while importers were fence sitters.

When the trend started reversing, following the equity market turmoil since mid-January, there were no further dollars to be brought in, while demand was emerging both from FIIs and importers.

The demand from importers went up since global crude oil prices shot above the $100 mark.

The shortage was so acute that most banks had to swap rupees with the Reserve Bank of India to generate local currency through buy-sell swaps. Since dollars for cash (on Monday) were expensive than future (forward) dollars, the premium for booking dollars for future turned into a discount.

Since the rupee started depreciating in mid-January dollar inflows had slowed down and RBI's foreign exchange kitty has swelled.

Since January 18, barring the week ended February 8, the RBI has been buying dollars from the market every week and purchases have ranged between $1.75 billion and $6.6 billion on February 29. These dollars were sold by exporters.

The RBI's purchase was seen as a move to infuse rupee into the market to ease liquidity which had tightened in January following advance tax payments and continuous rupee absorption through the market stabilisation scheme to contain inflation.

Other analysts are of the view that the RBI has been maintaining a conscious policy of rupee depreciation "� both for relief to exporters and to prevent outflow from portfolio investors.

Axis Bank's treasury head Partha Mukerjee said fundamentally the rupee continued to remain strong and was only a matter of time before it started appreciating again.

That was expected to start as soon as the domestic equity markets stabilised. Other custodian bankers said that compared to the extent of equity sell-off by FIIs, there has been no significant outflows from India.

According to Sebi data, January saw the maximum outflow of $500-600 million a day, which is now down to between $45 million and $100 million a day.