Strengthening dollar, rising oil and gold imports and weak domestic equities have collectively dragged the rupee down to a 11-month low of 57, breaching the key pshychological level on Thursday. The rupee has depreciated 5.2 per cent since the start of May and it stands in close proximity to last June’s record low of 57.32 against greenback. It also raises concerns over funding the country’s Current Account Deficit (CAD).
At the Interbank Foreign Exchange market, the Rupee closed at 56.84 a dollar, down 12 paisa from Wednesday’s close, which shook the Dalal Street with the BSE benchmark Sensex closing at 5-week low of 19,519.49, a loss of 48.73 points or 0.25 per cent.
For the ordinary man, a weak rupee implies travelling and studying abroad will become further expensive on the pocket.
Fresh data on inflation, trade and industrial output are expected ahead of the RBI’s policy review on June 17 and analysts don’t rule out a likely intervention from the RBI shortly. It may be noted that the RBI on Wednesday pitched in by raising the customs duty on gold to contain imports.
“The psychological level of 57 has been hit and thus it invites fears of some intervention. The market is a bit cautious at these levels,” said Paresh Nayar, head of foreign exchange trading, First Rand Bank.
Finance Minister P Chidambaram was quick to respond assuring investors that the weaking rupee was not a cause for alarm as inflows remained strong.
“The strengthening of dollar is impacting the currencies of countries with (high) current account deficit like South Africa, Brazil, Chili, Turkey. The rupee has depreciated but the flows are strong, especially in April and May. So, it is not a cause for alarm,” he said on the sidelines of Indian Banks’ Association’s AGM in Mumbai.
According to analysts, rupee was under pressure due to reduced expectation of rate cuts as RBI said “inflation has cooled significantly, but a possibility of a rebound still persists and that we might have to sacrifice growth to bring inflation under control”.
“In the short-term the government urgently needs to encourage capital inflows to fund the CAD. In the long-term efficiency of exports has to be improved. It will take time before the slide of the rupee is arrested,” said D K Joshi, Chief Economist, Crisil Research.
Persistent worries of high gold imports, rebound in crude prices have led to a worsening situation of India’s CAD.
“Indian rupee broke out of its 3 month-trading range between 53.75 and 55.20 on May, 20, 2013 and touched a low of 57 on Thursday due to global risk off sentiment, absence of large FII inflows and large dollar buying by oil companies and defence-related payment. After the range breakout, we have seen a sustained buying of dollars from all importers across the board, especially from oil companies. FII flows have also been on a fall since then,” said Hemal Doshi, Chief Currency Strategist, Geojit Comtrade.
Meanwhile, attributing rupee fall to rising current account deficit, RBI Deputy Governor K C Chakrabarty said the RBI will be taking steps to check currently volatility. “The issue is that...If we have a CAD and fiscal deficit, rupee has to orderly depreciate and if it doesn’t depreciate orderly, sometime it would be depreciating in-orderly,” he said.