Mumbai: The rupee weakened to its lowest level against the dollar in two months on Thursday due to year-end dollar demand and slowing foreign institutional investments in the local stock market even though the Reserve Bank of India (RBI) sold dollars to limit the local currency’s slump. Typically, demand for the dollar by companies rises as the fiscal year comes to a close to pay for imports.
The rupee ended at 51.2175 to the dollar, down 1.1% from 50.6575 on Wednesday.
If forward rates are anything to go by, the rupee is likely to weaken further. Three-month rupee forwards ended at 52.2725 to the dollar on Thursday.
Since 3 February’s close of 48.6950, the highest the rupee has reached this calendar year, the rupee has dropped more than 5% against the dollar, making it the second worst performing currency in Asia behind the yen, which has lost 7.5% of its value.
Since January, the Indian currency continues to be the best performing in Asia, gaining 3.61%, although its recent fall has forced it to surrender most gains made so far. It had risen 9% at the peak.
Foreign exchange dealers and bankers said rising oil prices and a weak stock market are prompting a rupee sell-off against the dollar.
Oil prices have risen 16% since January. Brent crude for May delivery was trading at $123 per barrel, up from $111 on 3 January.
Indian shares tumbled the most in Asia on Thursday after services and output in the euro area, the nation’s biggest trading partner, shrank more than estimated. “I don’t think the fall (is) India-specific. It’s a global sell-off,” Saurabh Mukherjea, director of institutional equities at Ambit Capital Pvt. Ltd, told Bloomberg UTV. The Sensex fell 2.3% to 17,196.47 points.
Jamal Mecklai, chief executive officer at Mecklai Financial Services Ltd, said dollar demand from importers has been strong as they pay off their creditors before the fiscal year ends.
“Supply of dollars from abroad has also not been so strong. But I think this movement is temporary, though my dealers do not agree,” he said.
Dollar supplies, mainly from foreign investors, have slowed. So far in March, foreign funds have bought stocks worth a net $1.7 billion, less than $5.13 billion in February and $2.18 billion in January.
The demand for dollars has traditionally been higher at the end of the fiscal year, said Harihar Krishnamurthy, treasurer at FirstRand Bank India.
“The movement in the rupee is a confluence of several factors, but it is mainly due to the traditional demand for dollars in March as well as the movement in crude prices that doesn’t bear well for the current account deficit,” he said. “The inflows may not continue in the same momentum as in the last two months because foreign investors would be monitoring the current account deficit and also the impact of a rise in fuel prices.”
India is expected to post a balance of payments deficit of about $10 billion in the quarter ended December, the first deficit since the Lehman bankruptcy in 2008, Sonal Varma and Aman Mohunta, economists at Nomura Financial Advisory and Securities, said in a report released on Wednesday.
Balance of payments constitutes a record of a country’s international payments and receipts, including trade. The figures are expected on 30 March.
Though sharp, the fall is temporary, said N.S. Venkatesh, treasurer at IDBI Bank Ltd.
“It’s month-end demand and fears of inflows slowing,” he said. “Also, don’t forget that the foreign exchange market is closed on Friday. There could be some covering because of that as well. I don’t expect the rupee to weaken much from here, but in fact gain to about Rs 49-50 per dollar next week.”
Banks, money and foreign exchange markets are closed on Friday on account of Gudi Padwa, the Maharashtrian new year.
Dealers said the rupee’s recent weakness has invited RBI attention and the central bank sold dollars to protect the currency on Thursday. Between September and January, RBI sold close to $20 billion in the spot market. Out of this, more than $7.3 billion was sold in January and $7.8 billion in December. In the forwards market, RBI sold $4.3 billion during this period.
Some dealers said the withdrawal of the proposed railway passenger fare hikes also disappointed investors because it could mean the government won’t go ahead with reforms under pressure from allies.
New railway minister Mukul Roy on Thursday rolled back fare hikes under instructions from Mamata Banerjee, who heads ruling coalition ally Trinamool Congress. Roy’s predecessor Dinesh Trivedi was forced to quit by Banerjee after proposing the increases in the 14 March rail budget.