The currency market bore the brunt of the meltdown on the bourses on Monday, with the rupee falling 0.74% against the dollar as foreign institutional investors (FIIs) rushed to buy the US currency from the market.
According to foreign exchange dealers, about $2 billion (Rs7,880 crore) was bought in the market, pulling the local currency down.
FIIs bought a record $17.4 billion of equities in 2007 and were behind the 12.5% rise of the rupee against the dollar. They have been selling equities since the beginning of this year and the activity escalated last week. After selling stocks in the domestic market, FIIs need to convert their rupee assets into dollars to take them out of the country.
The rupee ended at 39.58/59 against the dollar, losing almost 30 paise over its Friday’s close of 39.29/31 against the dollar. According to a dealer with a foreign bank, who does not wish to be named, Monday’s fall was not a surprising development. There was dollar buying in the market in the past one week but that was more than matched by the inflows for big-ticket initial public offerings (IPO), such as the Rs11,700 crore (IPO) of Reliance Power Ltd, the dealer said.
“With the IPOs being closed, the dollar outflows are getting noticed,” he said. “There was a small panic buying of dollar in the market, but that’s not a substantial one. The dollar has started gaining strength in the global markets.”
The one-month dollar future in the offshore rupee market now is being quoted at Rs39.70.
Foreign exchange dealers say the Reserve Bank of India (RBI) is unlikely to intervene in the market to stem the depreciation of the rupee that gained substantially last year, eroding income of exporters in rupee terms. “RBI does not mind the rupee losing against the dollar,” said another dealer who also wished to remain unidentified. “But if there is a sudden fluctuation, the central bank might intervene.”
It is not panic buying, said N.S. Paramsivam, head of global treasury at Essar Group. “The stock market has fallen more than 3,500 points in the last fortnight,” Paramsivam said. “The rupee didn’t exactly mirror the stock market so far. It was trading at 39.25/30 level for more than a month. So a little bit of softening of the rupee is a blessing in disguise and it would make the central bank’s job easier.”
According to Paramsivam, there have been a lot of stop-loss orders from big corporations for their imports. “If the rupee goes to the 39.60/70 level, there might be some panic buying by the importers as they would like to cover their position and this would push the rupee further down,” Paramsivam said, adding that he expected the rupee to go up to 40 a dollar by March.
However, Kotak Mahindra Bank Ltd chief economist Indranil Pan said the rupee will continue to appreciate and it may even touch the 39 mark to a dollar if the euro breaches the 1.50 level on a 50 basis points rate cut by the US Federal Reserve in end-January. The Fed has cut its policy rate by 100 basis points in three stages to 4.25% since September. As per the technical charts, rupee can appreciate to as much as 38.12 to a dollar, Pan has said in Kotak Mahindra Bank’s monthly research report on markets and economy, dated 18 January.
According to Pan, the rupee will weaken to 40.25-40.50 a dollar in phases, but likely to come back to 39.50-39.75 a dollar by end-March.