Mumbai: The rupee pierced the psychologically important level of 46 to a dollar in morning trade on Monday as foreign institutional investors (FIIs) rushed to buy dollars amid a huge sell-off in emerging market equities. Foreign exchange dealers expect the rupee to depreciate further, even as it recovered during the day to close at 46.06 to the dollar.
US effect: The rupee closed at 46.05 to a dollar, down from its Friday’s level of 45.75/76, even as the equity market recovered substantially. Ramseh Pathania / Mint
The Reserve Bank of India (RBI) intervened to stem the weakness of the local currency. The apex bank intervenes through public sector banks that sell or buy dollars in the market to prevent the sharp fall or appreciation of the local currency against the dollar.
RBI has been continuously selling dollars in past few months to facilitate the soft landing of the local currency.
India’s foreign currency reserves crossed $316 billion (Rs14.5 trillion) in May but following RBI’s dollar sales, they have come down to $288.8 billion in the first week of September.
“We cannot be sure of RBI intervention but it looked like it intervened at 45.97/99 and again at 45.92/93,” said Navin Raghuvanshi, associate vice-president, foreign exchange trading, at Development Credit Bank Ltd.
The currency market was seen shadowing local equities. Sensex, India’s most tracked equity index, tumbled 728 points in intra-day trade on news of US bank Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection and the sell-off of Merrill Lynch and Co. to Bank of America Corp.
FIIs bought dollars in the market to meet the demand back home. Since their exposure to Indian equities is in rupees, they need to cover the proceeds of their sales into dollars before taking them out of the country. So far this year, FIIs have taken out about $8 billion from Indian markets after pumping in more than double the amount last year.
Importers were also active in the foreign exchange market in the morning to take advantage of the falling prices of oversees crude oil.
Crude oil fell below $97 a barrel, promoting importers to buy oil for which they needed dollars.
The rupee closed at 46.06 to a dollar, down from its Friday’s level of 45.75/76, even as the equity market recovered substantially from the day’s low. After gaining 12.3% in 2007, the rupee has lost at least 14% this year and market participants expect it to lose more.
“There was some arbitrage happening between the local rupee market and non-deliverable forwards market overseas. That, coupled with FII and importers’ demand for the dollar, pulled the rupee down,” said Sanjeev Patra, senior dealer at Bank of Nova Scotia.
“I understand that RBI has a huge dollar reserve with which it can stop the rupee’s weakness. But it looks like the rupee should cross 47 by the year-end,” said a fixed income analyst with a foreign brokerage firm who did not wish to be named.
“The Rupee should trade at 46.50 a dollar and above within a month or so. We cannot assign an upper limit here,” said Raghuvanshi.
“It’s difficult to say at what level the rupee will trade by year-end; it all depends on the equity market. However, we expect it to cross 46.50 a dollar within the next few days,” said V. Rajagopal, chief currency dealer, Kotak Mahindra Bank Ltd.