Falling rupee has become a great worry for the country as it hit a life-time low of 58.16 against dollar on Monday meaning imports, particulary oil and gold, have become costlier further worsening already high current account deficit (CAD).
CAD touched a record high of 6.7 per cent of GDP in December quarter of last fiscal, which is likely to be in the range of 5 per cent for the 2012-13 fiscal. But experts say a CAD in the range of 2.5 per cent is sustainable. Neagative factors like heavy dollar demand coupled with slowdown in capital inflows put pressure on the rupee, as a result, it sank by a staggering 110 paise to life-time low of 58.16 against dollar forcing Government to say the panic is unwarranted and hoped the domestic currency will stabilise “in a while.
“If you see weakening of all currencies vis-a-vis dollar, rupee is also not unaffected in that sense. But I think this is panic (in) the market which is unwarranted,” Economic Affairs Secretary Arvind Mayaram told reporters on sidelines of a workshop here. This, he said, started off with misinterpretation of what Federal Reserve Chairman Ben Bernanke had said regarding Quantitative Easing (QE) recently.
“They have now more than clarified that this (Quantitative Easing withdrawal) is not imminent neither it is going to be something which will happen quickly. I think this will settle down in a while. We should not worry but we are watching the situation closely,” he said.
Forex traders said there were no visible signs of RBI intervention to arrest rupee slide but expectations are high that the central bank will come with restriction on banks overnight net long positions to reduce the volatility and speculation like it did last year. Attributing decline in rupee to high current account deficit and erratic capital flows, Chairman of Prime Minister’s Economic Advisory Council (PMEAC) C Rangarajan said whenever foreign investment is not steady, there is pressure on currency.
“I think the point is really that the fluctuation in the rupee is because of fluctuations in the capital flows. When capital flows revert (increase), I believe the value of rupee will strengthen,” he said. Commenting on the rupee fall, Chief economic adviser Raghuram Rajan said the weakness in rupee could be a temporary phenomenon. Rajan said India has large CAD, and currencies of emerging markets with large CAD have depreciated more.
“This could be temporary phenomenon. But again let me reiterate Government is not supportive of weakening of rupee and we would like more stability,” he said. Commenting on the rupee fall, Planning Commission Deputy Chairman Montek Singh Ahluwalia said the Reserve Bank is the best authority to deal with the issue. “You know this is something left best to the RBI to comment on. I would’nt make forecast. People speculate and they hedge. I think they have to make up their mind what they want to do,” he said.
On impact of rupee decline, Crisil’s Chief Economist DK Joshi said gold imports will taper down. The declining rupee, he said, will increase debt repayment burden for companies and increase foreign travel as well as education expenses. RBI Governor D Subbarao in a recent interview to the news agency had said the central bank does not target any level or band for the rupee against the dollar.
At the Interbank Foreign Exchange (Forex) market today, the rupee commenced lower at 57.18 and immediately touched a high of 57.17. The local currency further reeled under pressure to register a low of 58.16 and concluded at 58.15, a whopping fall of 109 paise or 1.91 per cent. Rupee’s earlier intra-day record low was 57.32 on June 22, 2012.
Previously, rupee had tumbled by 124 paise, or 2.57 per cent, on September 22, 2011 and by 119 paise, or 2.47 per cent, on November 12, 2008. last Friday’s better-than-expected US jobs data appears to have given the dollar a new lease of life as economic recovery of the the world’s largest economy means US Fed will probablt scale down its monetary stimulus programme soon.
Experts are already forecasting the battered rupee to sink further to near 60-levels. “Unless, RBI takes some kind of steps to stabilize the currency, the rupee may touch 58.50-58.90 level against dollar,” said Hemal Doshi, Chief Currency Strategist, Geojit Comtrade.The dollar index was up nearly 0.20 per cent against a basket of major rival currencies. Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: “Now investors are waiting for the monetary policy statement on June 17, which will provide the direction to the market. If rupee continues to fall further, RBI is expected to intervene before the announcement.”
The rising rupee means imports like oil may see companies announcing a hike in rates soon. According to Amar Ambani, Head of Research at IIFl, under-recovery estimates for oil marketing companies are expected to surge with the rupee touching new lows and crude oil prices bouncing back. Reacting to rupee life-time low, M Rafeeque Ahmed, President, Federation of Indian Export Organisations (FIEO) said that this kind of volatility may be good in the short term but would “impact the long term interest” of exporters.
The weakness in rupee has fuelled fears of capital outflows. “The US Treasury yields would look more attractive and that too could see a pullback in investor flows in the nation. High capital inflows support appreciation in the Rupee and vice-versa,” said Reena Rohit, Chief Manager-Non Agri Commodities & Currencies, Angel Broking.
Meanwhile, premium for forward dollar closed steady to better on stray payments from corporates and banks. Benchmark six-month forward dollar premium payable in November rose to 157-159 paise from last weekend’s close of 155-157 paise while far-forward contracts maturing in May ended at its last Friday’s level of 309-311 paise. The RBI fixed the reference rate for the US dollar at 57.7820 and for the euro at 76.2360.
Rupee stumbled against pound sterling to 90.36 from last weekend’s close of 88.90 and also slumped against the euro to 76.83 from 75.66. It, however, recovered smartly against the Japanese yen to 58.83 per 100 yen from 59.67.