Reserve Bank of India (RBI) is dipping into its foreign exchange reserves to defend the rupee, which has fallen 13.8% during the calendar year. The currency continued to tumble on Monday falling to a low of 72.67 against the US dollar before pulling back after RBI started dollar supplies. It closed at 72.45 against the greenback.
The demand for dollars by the oil companies is likely to kept outside the market so that the scarcity for dollars is controlled according to experts. Petrol price in Mumbai breached Rs 88 a litre level, one of the highest in the country.
RBI's persistent efforts to shore up rupee have shrunk its forex kitty. The reserves, which touched a life-time high of $426 billion in the second week of April thanks to a surge in foreign currency assets, are believed to have dropped below the psychological $400-billion level. As on September 8, the reserves had dropped to $400.11 billion and may have seen a further drop of $1-2 billion in the last two trading days after the RBI began to supply dollars through a public sector banks, according to forex experts. If the rupee rout continues, RBI may be forced to get more aggressive. But for how long?
Abheek Barua, chief economist at HDFC Bank, said, "Now the government and RBI has to speak in one voice and take some extraordinary actions to get the NRI deposits into the country, which may be under process. But it should be undertaken with immediacy so that the fall in the rupee may be arrested. Already, high oil prices are going to stoke inflation. Pumping forex from the central bank's kitty may not be the answer for the current problem."
Anindya Banerjee, currency analyst at Kotak Securities, said that exporters are selling hedges while importers want to buy cover as the dollar shortage continues. "The non-deliverable offshore rupee market is also lower than the rates in the domestic market," he said.
With most goods and commodities being transported by truckers the rise in oil prices will also stoke inflation. According to RBI's June policy statement, every 5% rise in oil prices will stoke inflation by 0.22%.
The foreign portfolio investors (FPIs) withdrew a net of Rs 1,021 crore from equities during September 3-7 and a net amount of Rs 4,628 crore from the debt market, taking the total to Rs 5,649 crore as trade war scares continue to drive out FPI to safe havens like the US treasury.
Forex experts said that RBI would have sold dollars of close to $1 billion as it tried to prevent the rupee from hitting Rs 73 to the dollar. Forex experts said that RBI was in the market when the rupee seemed to be hurtling towards Rs 73.
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