Experts says it was now clear that RBI would hike rates when it unveils its monetary policy on October 5
It seems as if all parts of the economy are conspiring against the rupee.
Oil prices are rising, trade wars are escalating the negative sentiment and the fickle foreign inflows that cushioned the exchange rate and markets are deserting for safe-haven destinations like the US Treasury or the Japanese yen.
On Tuesday, the rupee fell to another record low of 72.74 against the dollar, closing marginally above that level at 72.69/$. On Monday the rupee had closed at 72.45.
Reserve Bank of India (RBI) is not intervening strong enough in the forex market to supply the dollars to protect the domestic currency, according to experts. Foreign portfolio investors fled the Indian markets taking out another Rs 1,454.36 crore on Tuesday creating a severe dollar shortage. "RBI is sitting on a huge forex reserve which it must use aggressively. We have an import cover for over nine months. An NRI bond issue is needed only when we have an import cover of less than six months. The reason why RBI may not be intervening because they would like to see the rupee depreciate a bit more so the exports are more attractive and the trade imbalance is restored," said M S Gopikrishnan, head, financial markets, Standard Chartered Bank.
Experts said it was now clear that RBI would hike rates when it unveils its monetary policy on October 5.
There is a talk in the forex market that RBI governor Urjit Patel may go for an emergency rate hike, but experts said it was unlikely. Patel has always maintained that inflation targeting is the most important mandate of the central bank and not exchange targeting. So it is only logical to expect a rate hike in October and not before, they said.
"This was the time when RBI and governor Patel should be talking the most. Instead, all talk of protecting rupee is coming from the finance ministry," said head of treasury of a public sector bank.
"The market is disappointed at the inaction from RBI," said another currency trader. While most forex experts expect the oil demand to be taken off the market, the RBI is yet to take a call. The government had announced that rich Indians abroad could be tapped to bring in dollars, but even that is only a plan.
Foreign portfolio investors pulling out money from Indian equities and debt, rising oil prices and the negative sentiments unleashed by the trade wars has led to the rupee falling by over 13.8% this calendar year. The current account deficit widened to 2.4% of GDP in the April-June quarter, while capital flows fell, leading to a negative balance of payments.
According to RBI estimates, every 5% fall in the rupee can add 20 basis points to headline inflation. At present, the central bank sees CPI inflation at about 4.8% by the financial year end. The Monetary Policy Committee's mandate is one of flexible inflation targeting, with the target set at 4% with a deviation of 2% on either side.
FALLING KNIFE
Rs 4.14 lakh
crore lost by investors in past two trading sessions
150.60 points
Lost by Nifty on Tuesday
Rs 1,454.36 cr
worth of equities sold by FPIs on Tuesday
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