Mumbai: The rupee lost more than a quarter percentage point to touch 40.24 to a dollar on Wednesday—its lowest since September last year—but the six-month forward dollar rates continue to remain at a discount indicating a bullish view on the local currency in the medium term.
The Indian unit closed at 40.20 to a dollar as foreign institutional investors (FIIs) and banks rushed to buy the greenback from the market, which is already short of dollars because FIIs are increasingly slowing down fund flows in the country because of concerns about the weakening global economy and an impending recession in the US. FIIs have been net sellers to the tune of $3.14 billion (Rs12,623 crore today) since the beginning of 2008 in Indian equity markets after a record buying of $17.36 billion in 2007.
Oil prices, which breached $100 a barrel on Tuesday, also prompted importers to cover their positions in the short term. According to foreign exchange dealers, exporters, who were expecting the rupee to weaken further, were holding on to their positions to reap in gains at a future date.
Following Wednesday’s movement, the rupee, which appreciated 12.5% in 2007, fell about 2% from its January level. According to dealers, FIIs are buying dollars from the market as they sell more and more equities. In the last one-and-a-half months, FIIs bought $4.5 billion. Curbs on external commercial borrowings and restrictions on participatory notes, through which FIIs used to invest in India, also contributed to the drying up of dollar funds and dragged down the rupee. The six-month forward rate, or the difference between the spot rate and the expected rate of the dollar versus the rupee after six months, was 8 paise less than the spot rate on Wednesday, implying a long-term recovery of the rupee.
According to Harihar Krishnamurthy, Development Credit Bank Ltd’s head of treasury operations, although FIIs’ dollar buying has contributed to the rupee’s weakness, it is a short-term phenomenon.
“Forward rates remaining at a discount implies that although FII flow is turning negative now, it will start coming again,” Krishnamurthy said. Even if we expect the economy to grow at 8% per annum, still it makes India one of the top three attractive markets.” He expects the rupee at 40.50 to a dollar in the next few days.
Vikas Agarwal, an analyst with JPMorgan Chase and Co., also expects the rupee to recover in the long term, but to remain weak in the short term.
“We expect the rupee to remain weak as the dollar shortage will not disappear immediately and capital inflows will stay muted,” Agarwal said.
A JPMorgan Chase research note said weak global equity markets and continued US recessionary risks are unsupportive of rupee strength in the near term, but forecast end-year rupee to strengthen to 38.5 as “the anticipated rebound in US growth in the second-half of the year will most likely improve risk appetite”.