Mumbai: The rupee on Tuesday fell to its lowest level in nearly eight months as escalating worries about the euro zone’s banking system prompted investors to pull back from riskier assets and fanned strains in money markets, boosting demand for dollars across the board.
Traders said the euro’s drop to a near four-year low versus the US dollar also hurt the rupee. The index of the dollar against six major currencies was up 1.2%.
The partially convertible rupee closed at 47.71/72 per dollar, after hitting 47.75, its weakest since 1 October 2009 and 1.5% below 46.98/99 at close on Monday.
Last week, the rupee had fallen 3.8% in its biggest weekly drop since an 11.7% dive in mid-July 1996. So far this week, the rupee is down 1.6%.
“The fall in equities was too big for any small inflows to make a difference today. 48.30 looks like the next target for the rupee and could be tested in the next 10 days or so,” said Nitesh Kumar, an interbank dealer with Development Credit Bank.
Indian shares skidded 2.7% to their lowest close in three-and-a-half months as Europe’s sovereign debt woes sparked heightened fears of larger foreign fund outflows.
Foreign institutional investors (FIIs) have withdrawn nearly $2 billion from Indian stocks so far in May, reducing net inflows in 2010 to $4.6 billion. The withdrawals were a key factor for the rupee’s fall this month.
“Things are looking very dicey at the moment, so people are selling risk. Not very clear where the rupee is heading, but it is unlikely to strengthen in a hurry,” Kumar said.
“However, we may see a few bouts of strength on the back of the Standard Chartered public offering and the 3G money, but that will be absorbed by FII (Foreign Institutional Investor) selling.”
British bank Standard Chartered’s India share sale to raise up to about $580 million was roughly 5% subscribed on its first day, stock exchange data showed, as a global selldown kept a lid on demand.
Dealers said there was good demand from importers looking to meet month-end demands, which also weighed on the rupee. Oil is India’s biggest import and refiners are the largest buyers of dollars in the local currency market.
Demand for dollars tends to peak towards the end of each month, when importers are required to make the payments.
Traders said there were some inflows in early trade related to the Abbot Laboratories’ acquisition of Piramal Healthcare unit as also some third-generation (3G) mobile spectrum sale-related dollar selling, but these could not help the rupee much.
Abbott Laboratories Inc has said it would pay $2.12 billion up-front and make annual payments of $400 million for four years from 2011 to acquire the branded generics business of Piramal Healthcare.
The 3G spectrum auction, which concluded last Wednesday, yielded the Indian government Rs67,700 crore ($14.3 billion), nearly twice its expectations. The government has asked firms which have won the spectrum to pay up by 31 May.
The inflows are expected to limit the downside for the rupee.
One-month offshore non-deliverable forward contracts were quoted at 47.97, weaker than the onshore spot rate, suggesting a bearish near-term outlook.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 47.88 and 47.8775 respectively, with the total traded volume on the two exchanges at about $7.8 billion.