Traders say RBI sold $500 million in the money market to stop the rupee from sliding further; markets awaiting outcome of the 2-day US Fed meeting to get a clear signal
The Reserve Bank of India (RBI) intervened in the money market on Wednesday to prevent the rupee from sliding further. Traders in the foreign exchange market say the central bank would have intervened and sold dollars worth around $500 million in the market to stop the greenback from strengthening further.
The rupee ended the trade at 63.62 to the dollar, weaker than its Tuesday's close of 63.53, but stronger than the intra-day low of 63.89 per dollar.
In the initial trade on Wednesday, the rupee fell to 63.89, its lowest since November 13, 2013, when the state-owned banks like Bank of Baroda, Canara Bank and State Bank of India were seen selling dollars. The rupee's initial weakness came after foreign funds sold shares worth $196.56 million on Tuesday, their biggest single day net sales since October 17 and a sixth consecutive day of selling.
Markets are also anxiously awaiting the outcome of the 2-day Federal Open market committee meeting being held on Wednesday and Thursday. However, global market experts say that though the tone may change, they do not expect interest rate reversal until September 2015 despite improving employment data as the US is aware that its growth is linked to the pick-up in growth in global economies.
Ananth Narayan, regional head - global markets and co-head wholesale banking, Standard Chartered Bank, told dna, "The dollar has appreciated by 10% against major currencies while the rupee remained stable and was overvalued. Now it undergoing some correction, removing the complacency that investors had on the currency. After the elections a stable government at the Centre kept the rupee steady, but right now it is reacting to global cues like Russia hiking interest rate, slowing growth in major economies."
Experts say that rupee was overvalued with the 36 country real effective exchange rate (REER) showing a 9.6% appreciation well below the 19.6% appreciation in the 6-country REER. This exchange rate is used to determine an individual country's currency value relative to the other major currencies in the index, as adjusted for the effects of inflation. All currencies within the index are the major currencies being traded today -- US dollar, Japanese yen, euro, etc.
Siddharth Rath, head of treasury at Axis Bank, however disagrees that the rupee was overvalued. "The sudden interest rate hike in Russia, the FOMC meeting and the year-end profit booking by the foreign institutional investors have led to the depreciation of the rupee. We expect the rupee to bounce back to the Rs 61-63 levels," he told dna.
Gold imports also jumped 34% in November to $5.61 billion pushing up the trade deficit to 18-month high at over $16.4 billion. But experts expect the trade deficit to come down once the impact of the oil prices is factored in.
Foreign investors also turned sellers of debt for the first time in December on Monday, having sold a net $146.56 million. Many investor had held long positions in the rupee which they are shedding, bankers tracking the market said.
RBI's forex reserves currently amount to about $350 billion, excluding the 8-month import cover that the central bank needs to keep the forex reserves works out to $317 billion. This means that the RBI can sell $15 billion, leaving $17 billion as forex balance with banks, according a report put out by Bank of America Merrill Lynch.
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