Rupee Vulnerable After Hitting Record Low

22 November, 2011

The rupee fell to an all-time low on Tuesday as oil refiners and other companies scrambled to buy dollars, with the currency looking increasingly vulnerable to a swelling current account deficit and fears over the global economy and euro zone.

Exposure to short-term portfolio flows, a rising oil import bill and worsening government finances have heightened the risk for the rupee, Asia’s worst-performing currency this year, and the outlook remains bearish.

The rupee has skidded nearly 17 per cent from a 2011 high reached in late July as risk-averse investors flee emerging markets, increasing the difficulties for a government already struggling with high inflation, slowing economic growth and a widening trade gap.

The failure of a US super committee to reach a deal on debt restructuring could trigger another major round of selling of emerging market and risky assets.

At 3:15 p.m. (0940 GMT), the rupee was at 52.45/46 per dollar, after touching an all-time low of 52.73, and 0.6 per cent weaker than its previous close of 52.1550/1650.

“At this point in time, the options for the RBI and the government are really limited. The movement in the rupee is dictated more by macro fundamentals rather than speculation,” said N. Bhanumurthy, economist with National Institute of Public Finance and Policy in New Delhi.

“I will not be surprised if the rupee breaches the 53 level and stays there for some time. I don’t see a pullback till external macro conditions change.”

The falling rupee, combined with slowing growth, has added to a sense of urgency for a scandal-tainted government to push reforms to encourage investment.

The government has already raised ownership limits on government and corporate bonds and is considering allowing international retail investors direct access to Indian stocks, which have slumped some 21 per cent so far this year.

Foreign funds have sold more than $300 million worth of shares over the last week, reducing the net inflows in 2011 to just under $400 million, sharply below record inflows of more than $29 billion seen in 2010.

“India’s external position has become increasingly vulnerable to global risk appetite. Further weakness cannot be ruled out,” Royal Bank of Scotland said in a research note.

The rupee is down 14.8 per cent on the year, with the closest loser among other Asian units being the Thai baht, which has shed just 3.2 per cent, followed by the Malaysian ringgit that is down 3 per cent.

Is the Bottom Falling Out?

The three-month offshore non-deliverable forward contracts were quoted at 53.4, sharply below the onshore spot rate, suggesting a depreciation of another 1.8 per cent from current levels.

One NDF trader said the breach of the previous record low of 52.20 low had caused nervousness and people were seeing this as a vicious circle with everyone — including oil importers — jumping in.

Oil accounts for about a third of India’s total imports, and the value of oil imports grew 20 per cent last fiscal year due to expanding demand from the Asian powerhouse.

India’s current account deficit is expected to be around 3 per cent of gross domestic product (GDP) in the current fiscal year, compared with 2.7 per cent for the previous fiscal year.

The Reserve Bank of India (RBI), which usually intervenes to curb excess volatility, has been reluctant to step in and support the beleaguered currency, adding to a sense that the falling rupee may be a one-way bet.

RBI Governor Duvvuri Subbarao said on Tuesday he could not comment on whether the bank was intervening in the foreign exchange market to stem the rupee’s slide, but it was watching the situation and would ensure the exchange rate does not impair economic stability.

“We expect that a reverse adjustment (in the rupee) will take place when the European situation resolves itself,” Subbarao told reporters on the sidelines of an event in the southern city of Hyderabad.

Subir Gokarn, a deputy governor at the central bank, had said last week the RBI would be careful about using foreign exchange reserves aggressively to protect the rupee’s depreciation.

That view was echoed by Finance Minister Pranab Mukherjee on Tuesday, who blamed the fall on the international market and said that central bank intervention would have a limited effect.

“We expect there will be a self correction in the market,” Mukherjee told reporters, without elaborating.

The central bank was suspected of selling dollars at around 51.79 on Monday, but the selling pressure on the rupee was too strong, traders said. It appeared to have been the first time it has intervened in two months.

“The RBI’s efforts to cut the excessive one-way move have been futile,” said J. Moses Harding, head of the asset liability committee, and market and economic research at IndusInd Bank.

“There is not a single factor to bring the rupee bulls into the street who were in total control till July.”

But some analysts echoed Mukherjee’s view that the rupee could recover.

“This is a risk sell-off. And because it’s a risk sell-off, the rupee should inevitably rebound if and when risk conditions improve,” Jonathan Anderson, economist at UBS, wrote in a note.


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Rupee Vulnerable After Hitting Record Low

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