MUMBAI: Whether Mint Road wants it or not, by choice or default, it is giving in to the demand of harried exporters--hit by the 50% US tariffs--for a cheaper rupee. Despite the strong intervention of the central bank by selling dollars from the fast depleting reserves, the rupee breached the psychologically sensitive 90-a-dollar level in Tuesday afternoon trade before closing at a new all-time low of 89.95.
With this, the rupee, which has been the worst performing Asian currency so far this year, has depreciated by over 5.35% against the dollar. What is ironical is that the rupee since November has been losing against all its major international pairs, despite all of them also losing against the dollar.
For instance, between November 21 and 28, the rupee’s exchange rate fell against the dollar (from 88.64 to 89.46) and also against the euro (102.32 to 103.63), the pound (116.08 to 118.27) and the Japanese yen (0.5642 to 0.5720). This is also supported by the weakening dollar index, which was 99.41 earlier in the day on Tuesday.
And that’s nothing but good news for exporters, whether hit by US tariffs or not, as each penny loss in the rupee is an incremental revenue for the exporters as their books are still rupee denominated.
There are many voices urging the Reserve Bank to let the rupee find its own feet and not to waste costly forex reserves to place it beyond its real strength or value. Such voices became shriller after the US slapped 50% tariffs on shipments from our shores since August as the government was not forthcoming with a compensatory offer to harried exporters.
At the interbank forex exchange market Tuesday, the rupee in fact opened 5 paise higher at 89.70, but soon lost its keel and fell to a 89.92 pre-noon and as the equity market was also bleeding from the start, the rupee lost its ground further in afternoon trade to plunge to 90 to a dollar, down 47 paise over its previous close or 0.55%.
After breaching the psychological 90-a-dollar level intraday trade, propped up by RBI intervention the unit could barely recover 5 paise to close at a new low of 89.95—down 42 paise from the previous close. This is largely owing to continued short-covering from speculators and sustained importer demand for the American currency coupled with continuing jitters over the missing trade deal with the US and foreigners pulling out more and more from equities—having dumped shares worth over $17 billion since April.
"The 90 level is a major psychological barrier--and a cluster of buy-stop orders likely sits above it. This is precisely why the RBI must remain active below 90; if the pair starts sustaining above this zone, the market could quickly shift into a higher trending phase toward 91 or even higher," said Anindya Banerjee, commodity and currency head at Kotak Securities, in a noted.
At this stage, it is essential for Mint Road to prevent speculators from becoming too comfortable with a one-way trend, as that can trigger more volatility, Banerjee said.
Banerjee sees, from a technical side, the key support at 88.80–89, and immediate resistance at 90 and the next major hurdle is at 91. "A decisive daily close above 90 may embolden momentum traders and invite fresh speculative flows," Banerjee added.
"The RBI has been selling dollars, but it has also bought dollars when the rupee rose, thus keeping the demand intact," Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, said in a note. According to latest RBI data, it has sold a whopping $38 billion till September this year to defend the rupee in the spot market.
Bhansali also noted that the strong economic fundamentals, like the blowout GDP growth of 8.2%, are overshadowed by the rising dollar demand. Another pain point is the uncertainty around a trade deal with the US. "The government’s continuing promise of a deal within days has not helped the rupee at all but in fact has actually aggravated the dollar buying syndrome," he added.