Mumbai: The rupee rose on Wednesday against the dollar to close at 40.42/43 from its Tuesday’s level of 40.51/52, after the US Federal Reserve cut its interest rate by 75 basis points to 2.25% even though some currency dealers remained pessimistic about the Indian currency’s future performance.
One basis point is one-hundredth of a percentage point.
After gaining 12.3% in 2007, the rupee has fallen about 2.5% against the dollar so far this year even as the greenback is slipping against all major currencies such as the Japanese yen, the Swiss franc and the euro.
Foreign exchange dealers blame the capital markets for the state of affairs in the currency market. Following the Fed rate cut, the Bombay Stock Exchange’s benchmark Sensex rose 1.09% to 14,994.83 points, but is still down 26.09% in 2008. A similar story is playing out in other Asian markets.
In 2007, foreign institutional investors (FIIs) were net buyers of Indian equity to the tune of $17.5 billion (Rs71,295 crore then), but the trend has reversed this year and FIIs have sold stocks worth more than $3.4 billion net of buying.
“Inflows to India are drying up because globally the credit conditions have tightened. Already the regulators have put up a number of restrictions (for the inflows to come),” said A. Prasanna, vice-president of ICICI Securities Primary Dealership Ltd, a firm that buys and sells government bonds. “The oil prices are also going up, which is widening the gap of the current account. All these issues are starting to bite now,” he added.
India needs to import 70% of its oil needs and crude and petroleum products account for about 35% of the total imports.
After touching the record of $111.80 a barrel, oil sold for $109.42 a barrel in New York on Wednesday. Analysts say that the $100-plus a barrel price is here to stay for a while.
Given global markets’ uncertainties, experts are revising their forecast on the rupee. A JPMorgan Chase and Co. analyst said the bank is bearish on the rupee in near-term and it expects the local currency to drop beyond 41.50 a dollar.
Kotak Mahindra Bank Ltd, in its research report dated 18 March, said it expects the rupee to remain in a broad range of 39.50-42.00 to a dollar.
“We expect the domestic stock markets to remain under pressure as uncertainties in the global financial markets are expected to last longer,” the bank wrote. “This is expected to lead to a continued depreciation pressure on the rupee in the near term. Moreover, an increasing trade and current account deficit in the face of dwindling foreign capital inflows is also expected to keep the depreciation pressures on the rupee intact.”
According to some foreign exchange dealers, the rupee depreciation is good news for importers and the Reserve Bank of India (RBI).
“I think RBI will not like to intervene in this market,” said a dealer with a foreign bank, who did not want himself and his bank to be identified because of company policy.
Currency experts say Asian currencies will continue to weaken against the dollar as the capital markets are heavily dependent on foreign funds.
“Everywhere it’s a capital market story. All these economies are getting tonnes of monies from foreign investors,” said Development Credit Bank Ltd’s head of treasury operations Harihar Krishnamurthy.
The Fed rate cut although brought cheers to Asian markets, but somewhat failed to stem the weakness of the dollar against major currencies.
The dollar weakened against the euro, the yen and the Swiss franc on Bank of America Corp.’s assumptions that the Federal Reserve will lower its benchmark rate by another 75 basis points this year.
Experts also put the blame on acute dollar shortage in the Asian markets, including India, apart from the capital market debacle, for the dollar’s strength against these currencies. According to an estimate, Indian banks are facing a shortage of more than $200 million per day.
“Demand for the dollar is very large in the emerging equity markets. The dollar shortage in the system, apart from capital market weakness and some other country-specific reasons, in these markets are pushing the local currencies down,” said Arun Kaul, head of treasury of state-run Punjab National Bank.
Mohan Shenoi, head of treasury at Kotak Mahindra Bank, also said that demand for dollars is playing a big part in the local currency’s weakness. “The rupee is weakening here because of the demand-supply dynamics. The current account deficit has suddenly shot up and the portfolio flows have also thinned out. Both on the capital account and on the current account, outflow of dollars are more than the inflow,” he said.
In 2007, Asian stock markets gave spectacular returns. The growth rates in these capital markets were in double digits, with the Bombay Stock Exchange’s benchmark Sensex rising some 45%.
The Sensex has fallen about 27% in 2008. Among other markets, the Shanghai SE Composite index has fallen 28.51%, South Korea’s Kospi 14.49%, Kuala Lumpur Composite 17.89%. Japan’s Nikkei is down 19.91%, but the yen has strengthened more than 13% against the dollar, starting the carry-trade unwinding.
Bloomberg contributed to this story.