Mumbai: The rupee slumped to a 32-month low against the dollar on Friday, creating panic among companies that scrambled to buy the US currency to cover import bills.

The rupee closed at 51.34 to the dollar, at least 14% lower than its July high. Large Indian firms bought the US currency as the breaching of the 50-plus level triggered purchase thresholds. Volume in the interbank market was more than the $6-7 billion (Rs 30,805-35,940 crore) daily average.

“Most of the importers, about 70% of them, are not hedged. At the 46-47 level, the firms did not hedge their positions as they were expecting the rupee to touch 44-45 level," said Abhishek Goenka, chief executive of India Forex Advisors Pvt. Ltd, which advises firms on hedging strategy. “Now they are coming into the market in a big way to cover their positions."

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Analyst Moses Harding outlines the reasons for the fall in rupee and talks about how importers and exporters are coping

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The rupee is the worst performing Asian currency, depreciating more than 14% against the dollar year-to-date.

Reserve Bank of India (RBI) deputy governor Subir Gokarn had on Thursday clearly indicated that the central bank may not have enough capacity to intervene in the currency market as global volatility will continue for some more time. RBI is not targeting any particular level, Gokarn said in an interview to CNBC-TV18.

“In terms of defending a particular target, I go back to my point that to defend, you have to have capacity, and you could well end up in a situation where you lose capacity without having achieved your target, which makes it vulnerable for any kind of shock beyond that," Gokarn said.

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RBI’s stated position would have persuaded speculators and traders to safely bet that the dollar would appreciate further against the rupee, said the head of treasury at a large Indian conglomerate who didn’t want to be named.

“Cash reserves are built up to be used in emergencies and if the current situation doesn’t qualify as an emergency, what does? The RBI’s presence is needed in the (currency) market and there is a huge inflationary impact due to the pass-on of oil prices, and oil payments are not balanced by corresponding FDI (foreign direct investment) inflows," the person said.

The market is also suffering a dollar shortage as European banks have stopped supplying the currency and US banks are not rolling over buyers’ credit for importers, forcing them to buy from the market.

More than $1.37 trillion, or 43% of India’s total external debt, falls due by March. This includes $20.3 billion of external commercial borrowings and $68.47 billion of short-term debt, RBI data shows.

Foreign banks, which used to roll over most of the facilities, are not ready to do so now, currency experts said.

“Importers are in a panic," said Goenka of India Forex. “There is too much of negative sentiment in the market. There is no way it can be addressed unless portfolio flows pick up, or foreign direct investment is opened up. There are just not enough dollars in the market, there is no way that the rupee is going to strengthen on a sustainable basis in the immediate period."

This is happening at a time when forward rates are also rising. Even as the forward rate for the rupee-dollar exchange rate for December is as high as 50 paise, importers are forced to hedge their positions fearing a free fall of the local currency.

“Premiums used to be high for taking forward positions, so taking a forward hedge was an expensive proposition. But now due to the sudden change in circumstances, companies, especially importers, are rushing to the market to take short-term positions for one-two months," said Ajay Seth, chief financial officer (CFO) at Maruti Suzuki India Ltd.

Corporate entities should have hedged their positions earlier, said Adesh Gupta, CFO at Grasim Industries Ltd. “When you’re operating in a global environment, you have to have a sound risk-management strategy," he added. The slowing of dollar inflows reflects the lack of business confidence in the country, he said.

Seth expects the rupee to remain volatile for the next five-six months before showing some stability and eventually appreciating against the dollar.

The rupee’s depreciation has also coincided with yields on foreign currency convertible bonds (FCCBs) rising 5-7% since August, wrote Kotak Mahindra Bank Ltd in a research report recently. These bonds can be converted into equity unless repaid by the borrower.

“The extravagant issuance of foreign convertibles in the 2006-08 period has become a cause for concern as more than 70 FCCBs are expected to mature in the next 12 months," the 8 November report said.

Indian firms have raised debt of $13.6 billion through the FCCB route since January 2006. FCCBs worth $6 billion will mature by April 2013.

The exposure of Indian companies to FCCBs, rupee depreciation and the slide in share prices had prompted RBI to extend the window to allow companies to buy back premature bonds at a discount, using fresh foreign currency borrowings and their own cash. RBI is considering rules to curb FCCB issuances, Mint reported last month.

Companies have also been hit by an RBI directive advising banks not to lend dollars against the companies’ non-fund limits. A fund-based limit is based on cash flow, while the non-fund-based one depends on creditworthiness, and could be as much as 50% higher.

That’s closed off one of the options for getting cheap dollar funds, forcing companies to hit the market for dollars.

“The main problem is the large trade and current account deficit," said Ananth Narayan G., head of fixed income, currencies and commodities (South Asia) at Standard Chartered Bank. “Every month, about $5-6 billion inflow is needed to maintain the balance of payments. This flow is not coming. Fundamentally, things are still looking negative, but it looks like the pendulum has swung too much towards the depreciation bias. Things should improve a bit from here, although the volatility may continue till the first quarter of the next year."

Almost all currency traders expect the rupee to cross 52 to the dollar soon and even top its March 2009 low of 52.16.

From the beginning of the year, MSCI India has lost 30.71% in dollar terms, whereas the MSCI Asia Pacific Index ex-Japan lost 16.36% and the MSCI World Index lost 9.17%. MSCI tracks dollar returns.