Mumbai: The rupee plunged to a new low of 65.56 a dollar on Thursday with both the government and the Reserve Bank of India (RBI) failing to restore confidence in the financial markets. The US Federal Reserve (Fed) minutes hinting that the US was on course to begin tapering stimulus as early as next month also added to the nervousness.
“It’s total helplessness in the markets. We are clueless about what is going on,” said Satyajit Kanjilal, chief executive officer of Mumbai-based broker Forexserve, summing up the mood in the currency market on Thursday, when the battered local unit dropped to yet another new low for the fifth consecutive day.
Investors are anxiously waiting to see when the Fed will start to slow its $85 billion monthly asset purchases, with a section of the markets predicting that the stimulus would start being wound up in September. If indeed that happens, emerging markets, including India, fear a flight of capital from their respective markets, which will add to their economic woes.
After dropping to 65.56 a dollar, the rupee recovered to close at 64.63 on suspected dollar sales by RBI, a new closing low, down 0.92% from Wednesday. The battered Indian rupee is the worst performer among Asian currencies since January with a 16% loss against the dollar.
Currencies in Indonesia, Malaysia and Thailand all hit multi-year lows on Thursday on concerns that the Fed’s scaling back of stimulus would lead to further capital outflows from emerging markets, which have benefited for the last two years from waves of cheap money printed by Western central banks.
The one-month offshore non-deliverable forward contract was quoted at 65.83 compared to the onshore one-month forward of 65.49, suggesting offshore players are betting against the rupee.
The Indian unit hasn’t seen its worst yet, said a section of experts, who forecast the Indian unit to fall to the 70 levels. “Down-side risks to the currency prevail as steps to convincingly address its fundamental weaknesses have not been taken and are unlikely ahead of 2014 elections,” said Dariusz Kowalczyk, senior economist and strategist (Asia ex-Japan) at Crédit Agricole Corporate and Investment Bank.
“We see no fundamental value in the INR below 70 against the USD, and would not recommend buying it for fundamental reasons below 75.”
The equity market, however, looked up with investors rushing to buy stocks. The 30-share BSE Sensex gained 2.27%, or 407.03 points, at 18,312.94 after opening the session marginally lower, as metal stocks rallied on China’s improved manufacturing data, while blue chips rose on value buying.
The National Stock Exchange’s (NSE) Nifty ended up 2%, or 105.90 points, at 5,408.45.
The gainers included Hindalco Industries Ltd, which rose 10.93% to Rs.103.55, while Sterlite Industries (India) Ltd rose 10.42% to Rs.87.45 and Tata Steel Ltd jumped 10%.
The rally “smacks of bottom-fishing”, Dipan Mehta, a member of BSE and NSE. “Nothing has changed and the rupee remains under pressure. This is just a technical rebound.”
Stocks battered in each of the last four days marked their biggest single-day percentage gain in nearly two months, after an upbeat reading on China’s manufacturing sector, followed by a recovery in the rupee from a record low of 65.56 hit earlier in the day.
However, traders remain wary of foreign flows and rupee volatility at a time when overseas investors who had been net buyers of Indian stocks in 2013 sold a net $500 million worth of shares in the four sessions through Wednesday.
“There is no panic selling by foreign investors yet, but certainly if that happens, then it may weigh on equity and currency, which may feed on each other,” said G. Chokkalingam, managing director and chief investment officer at Centrum Wealth Management.
Finance minister P. Chidambaram at a press conference in Delhi said the rupee at the current level is under-valued, but many say that both the government and RBI have given up and are willing to let the unit find its own level.
“Indian policymakers have lost control over the currency,” said Moses Harding, executive director at Lakshmi Vilas Bank Ltd. “Fundamental factors have become too large to control. RBI has increased its effective operational policy rate by 3 percentage points. If that couldn’t save the rupee, then nothing can.”
On Wednesday, Deutsche Bank AG said the Indian rupee could touch 70 against the dollar in a month or so, although some revival is expected in the currency by the end of the year. “We continue to believe that fundamentally the rupee is undervalued and has overshot its equilibrium level substantially, but as numerous episodes of past currency crises have amply demonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time,” Desutsche economists at the bank wrote in a report. “India, we fear, is entering such a zone”.
The minutes of the last US central bank meeting showed that nearly all the 12 members of the policy-making Federal Open Market Committee (FOMC) agreed that a change to the stimulus programme was not yet appropriate.
The minutes provided few clues on the potential timing of a reduction,, but did little to dissuade people expecting a policy change next month.
“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes said.
The Indian central bank has been trying to arrest the currency slide through a host of measures, but nothing has worked so far to breathe life into the Indian rupee.
In June, RBI banned foreign institutional investors from accessing currency derivatives market on behalf of their clients, unless “a clear mandate from the sub-account holder” is produced, and restricted banks’ ability to take positions in the currency derivatives segment. It also asked banks not to do any proprietary trading in derivatives unless done to hedge on behalf of clients.
In July, RBI began taking steps to drain excess liquidity in the banking system and curb forex outflows. It capped the amount banks can borrow from its liquidity window and raised the daily balance requirement for banks on maintaining the cash reserve ratio, or the portion of deposits the banks need to park with the central bank.
On Tuesday, RBI announced its plan to infuse Rs.8,000 crore into the banking system through bond buybacks, marking a shift from its tightening stance. The measure helped to cool off the yields in bond market. A note by the CARE Ratings on Thursday said the rupee’s fall is driven more than fundamentals. Repeated efforts of RBI and the government to stem the fall in the rupee have yielded limited results, CARE said.
“We expect such volatility in the rupee rate to continue. With the exchange rate crossing the Rs.65 to a dollar mark and limited scope for RBI to intervene directly (given constraints on forex reserves), such free fall may persist amidst uncertainty,” CARE economists said.
Reuters and Bloomberg contributed to this story.