Rupee hits a new low as fall continues

Posted on    14 December 2011


Touches 53.52 to a dollar; most dealers say the currency can decline further against the greenback


The rupee fell to a new low of 53.52 a dollar on Tuesday before ending the day at 53.23, with the euro’s weakness against the US unit adding to the woes of India’s currency. It is under a fresh bout of pressure after factory output contracted for the first time since June 2009, sapping demand for local assets.


The currency, which fell for a sixth trading day on Tuesday, has lost 3.8% since last week. Since August, when Standard and Poor’s downgraded the US, the Indian unit has lost 17.19%, making it the worst performing currency in Asia.


The euro fell to $1.3160 in Asian trade, a two-week low because investors were disappointed by the outcome of Friday’s European Union summit to find a solution to the region’s debt problems.


The euro’s fall has prompted safe haven-buying of the US currency globally and this weakened the rupee, which has already been under pressure from weak economic numbers and nervous investor sentiment.


Many Indian corporations that have left their foreign currency exposure unhedged will be hit by the rupee depreciation. Foreign exchange losses on external commercial borrowings had eaten into many firms’ earnings in the July-September quarter. For instance, Tata Motors Ltd incurred a foreign exchange loss of Rs. 400 crore in the quarter.


The rupee depreciated 8.73% in the quarter ended 30 September. In the December quarter, it has lost 7.64% so far.


R. Shankar Raman, chief financial officer at Larsen and Toubro Ltd, said firms are better prepared now because the rupee has been falling for the last couple of months.


“After last quarter’s pain, when a lot of corporates were caught unawares, one expects that managements would have been a lot more proactive this quarter in protecting against the fall of the rupee. All data have increasingly pointed to weakness in the rupee which would’ve prompted companies to take forward covers,” said Raman.


Mohan Shenoi, treasurer at Kotak Mahindra Bank Ltd, said some expectations that France’s sovereign rating may be cut have helped the dollar globally.


“It is important for the government to attract long-term inflows, probably through foreign direct investment. Small measures such as increase in foreign investment ceiling in the debt market are not going to work because it is hot money and ultimately it will increase indebtedness,” he said. Hot money is a term for speculative capital flows chasing short-term returns.


In November, the government raised the ceiling for investment by foreign investors in corporate and government bonds by $5 billion in each category, taking the overall foreign investment limit in the debt market to $60 billion.


Besides, the Reserve Bank of India (RBI) raised the interest rate ceiling on foreign currency loans and interest rates on deposits for non-resident Indians to attract dollar inflows.


These measures, however, have had little impact so far.


Ashish Vaidya, head of fixed income and commodity trading at UBS AG, said RBI can provide a special mechanism to take away genuine dollar demand from the market.


“It can provide a window for oil companies to buy dollars, which could depress demand, besides selling dollars to increase supply,” he said.


RBI has been selling dollars for the last couple of months as it fights a persistently weak currency. In September-October, the central bank has sold $1.78 billion, RBI’s latest bulletin said, but till now it must have sold about $8 billion, according to foreign exchange dealers.


In 2010, RBI sold $1.69 billion.


“It is surprising that Indonesia, with much less forex reserves, has been protecting its currency aggressively while RBI has not been able to do so,” said a currency futures dealer. India’s forex reserves as on 3 December were $306.84 billion. Indonesia had $111.32 billion at the end of November.


Ashish Parthasarthy, treasurer at HDFC Bank Ltd, said it’s RBI’s call whether to let the current account deficit eat into reserves or let the currency depreciate.


“There can always be an argument on that, but the fact is that the rupee is under pressure by both sentiment as well as lower dollar inflows. The situation can change only when there is a floor set to either growth or inflation, which is likely only in the first quarter of calendar 2012,” he said.

The fundamentals for the rupee are very weak,” J. Moses Harding, a Mumbai-based executive vice-president at IndusInd Bank Ltd, wrote in an email on Tuesday. “Domestic cues are bearish and the external sector is yet to see the worst.”


A.V. Rajwade, an independent foreign exchange consultant, said the present rupee rate “seems reasonable”.


“RBI has enough reserves to intervene. However, if they are intervening now to arrest it, they should intervene (by buying dollars) when rupee is appreciating. Earlier, RBI used to follow a stable exchange rate regime. Only in the last three-four years, they have forgone it, which in my view is not the right thing to do,” he added.


While most dealers said the rupee can fall further, Harihar Krishnamurthy, treasurer at the Indian arm of FirstRand Bank Ltd, said the currency should stabilize at this level. “The rupee is reaching such a stage that after some time, importers will simply not be interested in buying such costly dollars. That will automatically stabilize the rupee.” he said.


Three-month offshore rupee forwards traded at 54.37 to the dollar, compared with 53.75 on Monday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.


Joel Rebello & Anup Roy


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