Mumbai: The rupee hit a more than one-year low at close against the US dollar on Thursday as oil prices reached a record of above $123 a barrel in global markets and Indian importers scampered to buy the dollar to hedge open positions in the short term.
According to market dealers, refiners bought dollars heavily even as the Reserve Bank of India, or RBI, stayed largely away from the market to let rupee depreciate further. The local currency hit 41.80 against the dollar during the day’s trade, but did not sustain this level for long and strengthened a bit to close at 41.76/77 from its Wednesday level of 41.36/37 a dollar. The last time the rupee closed below this level was on 20 April 2007, at 41.78.
After rising 12.3% in 2007, the rupee has slid close to 6% so far this year. The sliding rupee and rising oil costs have stoked fear of an increased trade deficit.
Earlier in the day, RBI governor Y.V. Reddy said the rupee’s fall against the dollar “is reflecting the global uncertainties, involving both the trade and capital accounts, which were already indicated and analyzed in the policy statement.”
“Trade and current-account deficits may marginally deteriorate this year, but this will be comfortably financed by capital inflows,” Reddy said in Shillong in Meghalaya, after a central bank’s meeting, Bloomberg news reported.
India’s current account deficit widened to $5.4 billion in the three months that ended on 31 December from $3.7 billion a year ago.
“This is not a global reflection as much as a local one,” said Harihar Krishnamurthy, head of treasury for Development Credit Bank Ltd.
Another treasury head of a foreign bank, who did not wish to be named, said 41.80 to a dollar can be a good resistance level for the rupee in the short term. “Although rupee touched 41.80 a dollar, we should not expect it would rest at 42-43 a dollar this month. It might hit that level at intra-day trade but won’t sustain at those levels. The market is expecting a resistance at 41.80a dollar.”
Dealers said importers are covering their position in the short term and the forward premium for the one-year dollar has not shot up much. “Despite analysts predicting that oil would touch $150 a barrel, importers are not covering their long position, which means the market expects the impact is in the short term,” Krishnamurthy said. In fact, the six-month forward dollar premiums payable in October slipped to 33 paise from its Wednesday close of 34 paise. The forward premium indicates the extra amount a buyer of dollar has to pay now to get the dollar six months down the line.
According to the treasury head of the foreign bank, a reason why investors are not worried in the long run is because experts feel the worst of the global credit crunch is behind us and investors will start putting in money in India. The US treasury secretary Henry Paulson on Wednesday told Associated Press news agency that the worst of US’s credit crisis may have passed.
Foreign exchange inflows in to the country, largely responsible for a bull run in the stock market in 2007, have turned negative. Foreign institutional investors bought $17.4 billion in Indian equities in 2007,but so far in 2008 they have turned net sellers of about $2.9 billion.