Rupee declines as uncertain Europe favours greenback

Rupee declines as uncertain Europe favours greenback

Mumbai:The rupee tumbled to a 28-month low against the dollar on Thursday, ending at 49.58 as the US currency’s strength against emerging market currencies and a fall in India’s stock market prompted investors to sell the local currency.

The rupee’s fall was despite attempts by the Reserve Bank of India (RBI) to sell dollars, at around 49.20 each, through public sector banks, forex dealers said.

The three-month forward dollar-rupee contract ended Thursday at 50.01 to the dollar, indicating dealers expect the rupee to weaken further.

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The dollar also rose against the South Korean won, the Indonesian rupiah, the Philippine peso and the Thai baht on Thursday though the strengthening against the rupee was the sharpest.

The rupee has now lost 10.21% since it touched 43.85 on 27 July, the most among emerging market currencies.

Analysts and economists say signs of a likely default by Greece are making investors more averse to risk and pushing them toward assets perceived to be more stable.

“If Greece defaults and Italy follows suit then it will become difficult to sustain the euro as a single currency and so investors are moving towards the dollar, which is considered more stable," said Anis Chakravarty, director, Deloitte Haskins and Sells, a consultancy and audit firm.

The euro’s fall against the dollar in early European trade also forced dealers in India to cover their positions on the US currency. From a close of 1.3573 in US trade on Wednesday, the euro fell further to 1.3410, down 1.2% on Thursday.

“There is a fear that the financial sector in Europe may be impaired and hence this volatility, which is global in nature. Even the IMF (International Monetary Fund) said yesterday (Wednesday) that the world economy is in a danger zone, so that is probably reflecting on the forex markets," said Dharmakirti Joshi, chief economist at rating agency Crisil Ltd.

Forex dealers are surprised RBI has not intervened in the market more aggressively.

The thinking in the RBI may be “to be hands off because it is a global phenomenon", said Samiran Chakraborty, head of research at Standard Chartered India.

The fall in the rupee has also increased pressure on foreign institutional investors (FIIs) to sell stock holdings in India because a weaker local currency diminishes the value of investments.

Provisional figures showed FIIs sold around $263 million of equities in the Indian market on Thursday.

So far this year, FIIs have bought shares worth $677 million, down from $17.13 billion in the same period last year.

Dealers said the sharp move in the rupee in the last one month or so has caught stakeholders off guard.

“The critical issue is the pace of the fall because such sharp moves are not good for anyone as both exporters and importers cannot take a decision," said Chakraborty of Standard Chartered.

A dealer with a private bank said exporters have either sold dollars already or are undecided about whether to hold on for a better level.

“At the start of the year we had expected a broad range of 43-44 per dollar to 47-47.50 per dollar, but now that it has moved beyond that so quickly it is very difficult to predict what will happen," he said, requesting anonymity.

The rupee is now getting close to breaching the psychological 50 per dollar level. It’s all-time low is 52.18 to the dollar, which it touched in March 2009 at the peak of the global financial crisis.