Rupee at new low, St for stronger RBI, govt action

It has been over two weeks since the rupee started posting fresh record lows against the dollar. However, except for forex intervention, there have not been any solid measures taken by the government or the Reserve Bank of India (RBI) to stem the downslide.

On Monday, the rupee closed at new record low of 59.68 per dollar, 41paise or 0.7% lower than the previous close.

The local currency traded between 59.54-59.82 per dollar levels, not very far from the 60 per dollar mark. Last week, it had registered an all-time intra-day low of 59.98 to a dollar.

Heavy foreign exchange intervention by the RBI has so far kept rupee from crossing the psychological level of 60 per dollar. But with limited forex reserves, stronger measures are required to support the  rupee.

According to Indranil Sen Gupta, India Economist at Bank of America Merrill Lynch, RBI can sell $30 billion and every dollar sold will only breed further doubt about adequacy of our forex reserves.

“After all, this will further pull down import cover to 6 months- last seen in early 1990s- from 7 months now. As every round of forex volatility costs $15-20 billion, the RBI has barely enough to tide over, say, a year, in our troubled world,” said Gupta.

Measures like issuance of bonds for non-resident Indians, hike in foreign institutional or direct investment limits are expected.

Market participants said that rupee-dollar exchange rate is expected to stay volatile.

In fact, after seeing outflows from the debt segment, there are fears of foreign institutional investors (FIIs) pulling out from Indian equities as well.

Standard Chartered Bank economists Samiran Chakraborty and Priyanka Kishore said the rupee is much more vulnerable to equity outflows compared to bonds. Moreover, persistent fall in rupee value is bad for the economy.

“Sustained rupee weakness of 10% is likely to add 1.5-2 percentage point to the headline inflation, eroding the possibility of further RBI rate cuts,” they said in a report. The foreign bank expects rupee to fall to 60.5 per dollar levels by year-end.

But economists Dharmakirti Joshi and Dipti Deshpande at Crisil believe the current capital flight from India is a short-term phenomenon and is largely in response to the uncertainty surrounding the impact of the Federal Reserve’s pullback of quantitive easing. So they expect rupee to appreciate to around 56 levels by end of current financial year.