Mumbai: The rupee’s sharp slide against the dollar this week has renewed speculation in the market about a coming sharp depreciation in its value and some foreign exchange dealers say that if banking regulator Reserve Bank of India (RBI) does not sell dollars in the market, the local currency could fall as low as 45 to the dollar, a level last seen in October 2006.
The local currency, which started this week at 43.05 to the dollar, slipped to an 18-month low of 43.87 in intraday trades on Wednesday. The local currency touched its all-time low of 49.050 on 16 May 2002. The rupee rose 12.3% in calendar 2007. This year it has thus far depreciated in value by around 10%.
Although the fall in the local currency has benefited exporters in the country, importers, particularly the oil firms, are likely to have been badly hit, especially because they cannot take advantage of the recent fall in the price of crude. India imports 70% of its oil needs. Since all oil purchases are in dollars, importers now have to pay more rupees for the same amount of dollar. A higher import price will also push up inflation, which is now at a 16-year high of 12.44%.
While crude oil prices have dropped almost 30% from their mid-June peak of $147 a barrel, the dollar is also strengthening against the major currencies of the world.
After having a bull run against the dollar early this year, the euro fell sharply in August. One euro fetched 1.58 dollars in June but by the second week of August, this had come down to 1.49. Similarly, one pound sterling was equivalent to 1.99 dollars in June, before falling to 1.87 in August. The yen too fell against the dollar during this time — from 106.10 a dollar to 109.70.
The slump in the major currencies against the dollar coupled with India’s widening trade deficit and vanishing portfolio inflow have put currency traders on high alert. After investing around $17.5 billion in Indian equities in 2007, foreign institutional investors have taken out $6.7 billion from Indian market this year.
The rising dollar is prompting oil marketing companies to hedge their imports and recently refiners have become major buyers of dollars. The acute dollar shortage that started in February this year still persists.
“There continues to be an excess demand for dollars in the spot market as the balance of payments remains under stress,” said Vikas Agarwal, analyst, JPMorgan.
“Importantly, hedging dynamics have changed, as exporters are not increasing their hedge ratios. RBI has not yet indicated any discomfort with the recent rupee weakness. This could be because it has occurred in a backdrop of broad-based dollar strength.”
Another foreign exchange dealer with a private sector bank said his bank expects the rupee to cross 45 to the dollar in the next three months.
“Currency movements in emerging markets depend mainly on portfolio inflow. India is no exception. There is hardly any foreign funds flow in the country. The trade deficit is also pretty large,” added the dealer who did not wish to be named as he is not authorized to speak to the media.
However, not everybody shares this grim outlook.
“I expect the rupee to touch 44-44.5 a dollar in a month and after that it should start strengthening,” said Kiran, associate director, foreign exchange at Yes Bank Ltd.
“The kind of sentiment prevailing in the market should correct by December and portfolio investment should pick up from that time.”
Indranil Pan, chief economist for Kotak Mahindra Bank Ltd said the rupee is definitely looking weak but would not significantly depreciate from the current level.
“The oil range shift has largely happened and we don’t foresee further momentum in oil prices. Also, the dollar has appreciated enough against the major currencies and there might not be much of a headroom left for the currency. Hence, we are looking at a range of 42.50-44 rupee a dollar in three-six months.”
However, Pan added that it is difficult to pinpoint at what level the banking regulator should be comfortable holding the currency, but said “there is a heightened expectation that RBI would be holding the rupee at 44 a dollar to contain inflation.” And a weak rupee wouldn’t necessarily help exporters as they need to import raw materials for re-export, added Pan.
RBI has been sporadically selling dollars to contain volatility and the sharp fall of the rupee. The foreign currency assets of RBI dropped by at least $5 billion in the first week of August to $300 billion.