Rupee falls to all-time low on FII outflow

Rupee falls to all-time low on FII outflow

Mumbai: The rupee dropped to a lifetime low of 49.50 to a dollar in intra-day trading on Wednesday as a selling spree by foreign institutional investors (FIIs) caused the Bombay Stock Exchange’s bellwether equity index, the Sensex, to tumble 4.8%. Analysts expect the local currency to touch the 52 level sooner than later.

The rupee closed at 49.32 to a dollar after the Indian central bank sold an estimated $2 billion to meet demand for the US unit. The currency has declined more than 20% this year, making it the worst performer in Asia after the South Korean won, which has lost some 32%.

FIIs are dumping Indian stocks to send money to their home markets, reeling under a credit and cash crunch, in the process hammering the rupee down.

The 30-stock Sensex index, which has declined 50% this year, fell 513.49 points to 10,169.90.

The Reserve Bank of India, or RBI, which cut its policy rate by 1 percentage point this week, is expected to lower the rate further, reducing demand for the nation’s assets and exerting pressure on the rupee to decline.

Also See Fall of currency

“Given the continuing US dollar strength, bearish sentiment towards emerging economies, and still-persistent outflows from India, it is only a matter of time before rupee hits 52 to the dollar, despite aggressive RBI intervention," said Rajeev Malik, head of India and South-East Asian economics at Macquarie Capital Securities (Singapore) Pte Ltd.

Some foreign exchange dealers said RBI’s $2 billion of dollar selling on Wednesday was backed by a large Indian corporation.

RBI’s continued intervention has brought down its forex reserve to around $274 billion by 10 October from $316 billion in May. Since then, the pile of India’s foreign exchange reserves has shrunk further.

RBI’s aggressive dollar sales is also drying up rupee liquidity. For every dollar it sells, an equivalent amount in rupees is drained from the system.

The central bank has cut banks’ cash reserve ratio (CRR), or the proportion of deposits that commercial banks need to keep with it, by 250 basis points, releasing Rs1 trillion. One basis point is one-hundredth of a percentage point. It may have to cut CRR again if it continues to sell dollars.

RBI governor D. Subbarao may reduce the policy rate again on Friday by as much as 50 basis points to 7.5%, according to Peter Redward, head of research for emerging Asia at Barclays Plc.

“The central bank’s moves are predominantly focused on liquidity management and financial markets stability," Singapore-based Redward had told Bloomberg in a phone interview this week. “That will still not be an attraction for overseas investors which is why we think the rupee will weaken further."

The central bank’s cut on Monday was the first reduction in the policy rate since August 2003. After the cut, the rate advantage for a global investor over the US narrowed to 6.5 percentage points from 7.5 percentage points. The gap with Malaysia shrank to 4.5 percentage points from 5.5 points and with Thailand to 4.25 percentage points from 5.25 points.

After buying a net $17.5 billion of Indian equities in 2007, FIIs have taken out at least $12 billion from the Indian stock markets this year.

“The recent rupee weakness owes to a variety of factors but has been compounded by the steep pace of withdrawal of funds by foreign investors from the equity market," said Vikas Agarwal, fixed income and forex strategist, JPMorgan Chase Bank.

The pull-out has led to an acute dollar shortage in the market. Traditionally, exporters convert their dollar receipts into local currency, which takes care of the dollar demand-supply mismatch. But exporters did not anticipate the sharp fall in the rupee and had sold most of the dollars in their possession at the 47.50-48 level.

Now the sole supplier of dollars in the market is RBI.

The stress in global credit markets is not letting Indian firms and banks borrow overseas even after the RBI and the government opened windows for capital inflows into the country.

To attract foreign investments, the central bank eased its norms for foreign currency convertible bonds, doubled FII limits in the corporate bond market andraised interest rates on non-resident Indian deposits. But pressure on the rupee has persisted.

“Although in the short term the RBI measures have not yielded any result, we think in the medium term once the credit market stabilizes, this will lead to dollar inflows," said Agam Gupta, head of foreign exchange trading at Standard Chartered Bank’s Indian unit.

“Right now there is not too much appetite for anyone to give capital."

Gupta said the bank is revising its forecast of 48.50 rupees to a dollar for December.

Anoop Agrawal of Bloomberg contributed to this story.