Rupee hits all-time low as dollar gains on banks’ ratings downgrade

Rupee hits all-time low as dollar gains on banks’ ratings downgrade

Mumbai: The local currency on Friday slid past the 57 to the dollar mark as the greenback rallied against all currencies after rating agency?Moody’s?Investors?Service downgraded 15 global banks and stock markets fell worldwide.

The rupee touched an all-time low of 57.3025 to the dollar in intraday trade, the second consecutive day on which it sank to record lows, following cues from its Asian peers and the euro. It closed at 57.12 to the dollar on Friday?against?56.30?on Thursday.

According to foreign exchange dealers, the Reserve Bank of India (RBI) is adopting a hands-off approach in the currency market and only intervening, or selling dollars, to smoothen out volatility. RBI is not trying to protect any level as that could prove futile in this volatile environment.

The mood in global equities and currency markets was already sour after the US Federal Reserve refused to increase its asset purchases plan. Any hope of easy money through a third quantitative easing was also quashed. Economic data released in the US showed the world’s largest economy is slowing. Jobless claims for the week ended 16 June were at 387,000, higher than market expectation. The Federal Reserve Bank of Philadelphia’s factory index dropped; existing home sales fell. Consequently, the S&P 500 Index fell 2.2% to 1,325 points. The mood in the global economy was reflected in global crude prices that fell $3 to $78 a barrel.

Ironically, in such a situation, the dollar rallies, partly because it’s considered a safe haven currency, and partly owing to most global investors originating from the US and having to retract to base, liquidating investments in other countries. The worst affected in these situations are emerging market currencies—the rupee being a prime example, depreciating more than 21% in the past year, ever since the US was downgraded by rating agency Standard and Poor’s.

“The rupee has become a convenient proxy for all emerging market currencies," said M. Natarajan, Mumbai-based head of treasury at Bank of Nova Scotia.

“The rupee is depreciating not only because of global factors but because of local factors as well. The government has to bring down the fiscal deficit. RBI has done what it could do, given the present situation. The ammunition left with them (RBI) is pretty limited," he said.

The local currency turned for the worse since August last year. To curb volatility in the system, RBI initiated a series of measures, including restricting banks’ ability to trade in the currency market and preventing speculators from entering the currency market by raising restrictions in the forwards market. Between September and April, it also sold more than $20 billion in the spot market to check volatility.

The measures, while strengthening the currency in the short term, till February, were rendered futile as the local currency started losing sharply against the dollar. From its February high of 48.70, the rupee is now expected to cross 58-59 in the next two months, if not in a few weeks.

The rupee seemed to have stabilized at 55-56 in mid-May to mid-June and exporters began selling dollars. Those who had hedged future dollar earnings are dismayed, said dealers.

“When the currency was at 51-52, most exporters had hedged dollars," said a dealer with a foreign bank who did not want to be named. “Now they are sitting on mark-to-market losses (MTM) on those hedges as rupee continues to depreciate."

MTM involves valuing an investment at current prices, instead of historical rates. In February, when the rupee was stronger, exporters sold their dollars in the futures market at 53-55. Since RBI has banned them from booking forward contracts after cancelling them, they cannot help but see their notional losses on exchange rates rising as they lose out on the increased value of the dollar. They are making sure they don’t repeat the mistake. Most of them are sitting tight on their dollar holdings and only sporadically releasing them—when rates suit them.

“There will be considerable dollar inflow at 58-59 level. Before that, exporters won’t come," said the senior dealer with the foreign bank. “Honestly speaking, this is the time when options are the perfect tool. But option is such a dirty word now after banks mis-sold them. Corporates are also not willing to come into options contract. Banks are also afraid of RBI ire. But plain vanilla options should have been there in the market."

According to Pradeep Khanna, managing director and head of forex trading, HSBC India, exporters should find these levels attractive and start selling. “It is difficult to predict a level but rupee should consolidate around current levels," Khanna said, adding the rupee is largely abiding by dollar strength, which is also helping soften crude prices.

India imports 80% of its oil requirement. RBI has discussed with state-run oil firms the steering of 50% of their dollar buys through a single state-run bank to smoothen volatility in the rupee, though no decision has been made, Reuters reported on Friday. There has been wide speculation about such a move since the rupee began to drop to record lows against the dollar in May. Oil firms account for $10-12 billion of dollar demand in the domestic currency market each month, according to HSBC.

Meanwhile, R.S. Gujral, finance secretary, said on the sidelines of an event in Delhi that RBI was intervening in the market to counter short-term sudden movement in the rupee.

“Aspect of direct supply vis-a-vis the oil marketing firms is also a step in that direction," he said.

“Exchange-rate determination is broadly in RBI’s domain and the central bank monitors the situation and takes appropriate action. The government action in terms of any supportive measures for ensuring higher inflows of foreign exchange are separate matters, which the government is conscious of and is taking appropriate action," he added.

Remya Nair and Bloomberg contributed to this story.