Rupee fall continues, more RBI steps likely

Rupee fall continues, more RBI steps likely
ENS ECONOMIC BUREAU

August 7: The Indian rupee hit a fresh low on Monday as central bank moves to further tighten domestic money market liquidity failed to check the currency's slide.

The rupee hit its all-time low of 45.58/59 per dollar in morning trade, pushed down by strong corporate demand and poor supply, with no signs of central bank intervention. The market was again agog with rumours of another hike in bank rate and cash reserve ratio to stem the rupee fall.

In hectic activity at the interbank foreign exchange (forex) market here this morning, banks and corporates scrambled to cover dollar positions and sent the rupee plummeting to historic lows, dealers said. Opening around 45.43/47 per dollar, lower from last Friday's record low close of 45.41/42, the rupee tumbled to 45.57/59 before closing at 45.55/56, showing a loss of 14 paise.

``Nervousness has gripped the forex market. The rupee appears to be in an unchartered territory, testing new lows practically every day following a spate of dollar demand from all quarters. Corporates and importers are in a hurry to hedge their positions,'' a forex dealer said.

The Indian currency has lost about 4.6 per cent against the dollar since the beginning of the year, but has appreciated or held its ground against other major currencies. The latest fall has come despite aggressive moves by the Reserve Bank of India (RBI) to drive up short-term interest rates and drain liquidity from the domestic money market, which it suspects of funding positions against the rupee.

RBI sucks out Rs 8,260 cr: On Monday, the RBI raised the yield on the one-day government securities repurchase agreement (repo) to 12.50 per cent from 8.25 per cent last Thursday and on the four-day repo to 14.50 per cent from 10. It sucked out Rs 8,260 crore on Monday through its repo auctions.

These moves followed a two-stage hike in banks' cash reserve ratio to 8.5 per cent from 8.0, a cut in refinance limits and a hike in the benchmark bank rate to 8.0 per cent from 7.0, announced on July 21. The moves did little to prop up the rupee, quoted at 45.55/56 in afternoon trade. ``If the rupee fall continues, the RBI might hike the bank rate and CRR again,'' said a dealer.

Analysts drew comfort from tame US jobs data, which may check the dollar's strength against other major currencies. Data released on Friday showed the US labour market had eased in July, boosting expectations the Federal Reserve would keep interest rates on hold when it meets on August 22. "Stable US interest rates will be good for most emerging markets. India too should be a beneficiary," said an analyst.

But over the longer term the rupee, convertible only on the current account, could suffer from a slowdown in foreign capital inflows this year and a widening trade deficit, analysts said. Foreign funds have sold a net $ 8.3 million of equities so far in August, after selling $545.7 million in June and July.

The benchmark 30-share Sensex is 32 per cent off its February high and 16 per cent lower than its 1999 close. And the trade deficit has widened around 26 per cent in the April-June quarter over year-ago levels. Moreover, commercial banks have started increasing prime lending rates.

Foreign exchange reserves have fallen more than $ 2.0 billion since April to hit $ 36.196 billion on July 28, partly reflecting the RBI efforts to improve dollar supplies to the local currency market. Traders said there was strong demand for dollars on Monday and that enquiries for September and October delivery-dollars reflected importers' anxiety over the future.

But analysts said the rupee's current slide could be bottoming out. "We are pretty close to where the RBI would like to see the rupee, based on the conventional real effective exchange rate (REER) model," said a banker. By that measure, which tracks a basket of four major currencies with a base year 1993/94, the rupee at its low of 45.58 per dollar was around one per cent undervalued, analysts said.