Rupee continued its downward slide due to the euro zone crisis

RBI intervention fails to arrest decline, experts feel govt must get house in order to weather shocks

The rupee continued its downward slide due to the euro zone crisis, closing at an all-time low of 53.83 a dollar today. Though the Reserve Bank of India (RBI) intervened by selling dollars, it was unable to arrest the fall.

The political upheaval in Greece continued to hurt the sentiment across the world, as political parties haggled over chances of renegotiating the terms of a bailout. The weekend elections in France and Greece had seen voters reject harsh austerity measures. Banks on today sold dollars on behalf of the RBI when the rupee hit the 53.80 levels, which helped the currency recover to 53.70. But, last-minute demand from importers hurt the currency further. The previous closing low was recorded at 53.72 on December 14, 2011. The currency has depreciated two per cent since the start of this month and 5.8 per cent since April 1.

“The present environment is dominated by euro zone concerns, triggered by the political uncertainty in Greece. Downside risks to the rupee persist, with tangible risks that we breach the 2011 highs in the near future,” said Priyanka Kishore, FX strategist, Standard Chartered Bank.

In the last seven days, the rupee has been on the decline steadily, barring Monday when news of the deferment of the General Anti-Avoidance Rule saw it rise marginally. Bankers felt there may be no respite for the rupee due to weak macroeconomic fundamentals and it may touch 57-a-dollar levels.

“Let’s be prepared for a shift into a short-term range of 52-57, with initial bias into the higher end. While the expectation of a sharp reversal from 57 to 52 is valid, we shall review this as the rupee approaches 56-57 by July-September 2012,” said Moses Harding, head, economic & market research, IndusInd Bank.

The stock markets also fell as foreign institutional investors (FIIs) turned net sellers. The Bombay Stock Exchange (BSE) benchmark, Sensex, fell 66.6 points, or 0.4 per cent, to 16,479.58. At the National Stock Exchange, the 50-stock Nifty index lost 25.15 points, or 0.5 per cent, to 4,974.80. FIIs were net sellers of Rs 376.34 crore, according to provisional data from the BSE.

While market experts agree today’s fall was due to the euro zone crisis, many feel India needs to get its house in order to be able to face external shocks. Said Prabhat Awasthi, managing director, Nomura Financial Advisory & Securities, “The current account deficit (CAD) has been widening for some time. However, the recent widening coupled with pressure on the capital account makes it increasingly difficult to finance the CAD. The solution to this should come from the government by reducing subsidies, which will eventually lead to a cooling down of demand.”

Some estimates suggest the system is short of $7-8 billion every month to meet its obligations on the current account front. The RBI, constrained by low foreign exchange reserves and liquidity implications, may have limited scope to intervene in the market and should opt for regulatory changes to boost the domestic currency.

“The RBI had announced some measures last week, like hiking the cap on FCNR (B) deposits and deregulating the ceiling rate on export credit. But, stronger steps are required to have a meaningful impact on the rupee, like the re-introduction of an IMD (India Millennium Deposit)-like scheme, direct dollar imports for PSU oil companies, etc,” Kishore of Standard Chartered Bank said. India’s foreign exchange reserves had fallen by $18 billion to $295 billion over a year as on April 27.

However, market experts fear outflows may continue for some time due to repayment pressure. “In the short term, there will be capital account-related outflows due to the repayment of money raised in 2007 through ECBs. This will nullify some inflows that happen,” added Awasthi.

Corporate India is also worried about the falling rupee and feels the reforms process needs to be kicked off sooner than later. Said A Mahendran, managing director, Godrej Consumer Products, “A depreciating rupee doesn’t bode well for the economy. Imports will get expensive and the fiscal deficit will increase. While the RBI will intervene to arrest the rupee’s fall, in the medium term the reforms process has to get going. With that, the macroeconomic fundamentals will improve and currency depreciation will stop.”

Source : BS