RBI steps in to save rupee fall

“… 50% of the balances in the EEFC accounts should be converted forthwith into rupee balances and credited to the rupee accounts as per the directions of the account holder," RBI said in a notification on Thursday morning.

The rules also apply to resident foreign currency account and diamond dollar account, which is held by those who deal in precious stones. The combined outstanding amount on these two accounts is $2 billion, which means at least $1 billion of that will flow into the market.

The rupee rebounded from a near five-month low after the RBI’s announcement. The currency rose as much as 1.6% amid speculation that the central bank also intervened in the market to sell dollars. It advanced 0.8% to 53.4250 per dollar as of 1:41 p.m. in Mumbai, according to data compiled by Bloomberg. It had touched 53.9225 on May 4, the lowest level since falling to a record low of 54.3050 on 15 December.

The Bombay Stock Exchange’s Sensitive Index, or Sensex, was little changed at 16,482.94 in Mumbai.

Said Paresh Nayar, head of money-market and currency trading in Mumbai at FirstRand Ltd. “The rupee has to strengthen because of the RBI moves but we have to wait and see how it reacts in the coming days as we still have a trade deficit, which means demand for dollars will be strong."

The rupee depreciated 1.36% against the dollar to 53.82 levels on Wednesday, its biggest daily percentage loss since 12 December.

RBI, since September, has sold more than $20 billion in the currency market to meet the dollar demand of importers. Exporters have not been forthcoming in releasing their dollars in the market, expecting the rupee to depreciate more.

RBI said EEFC account holders will be permitted to access the market for purchasing foreign exchange only after using up all the money in their accounts. That means they wouldn’t be able to hold their foreign exchange earnings and wait for a favourable exchange rate at which to sell the money.

“RBI’s message is plain and simple – don’t indulge in speculation. Use the currency market for genuine purposes, not for profit making," said N.S. Venkatesh, head of treasury at IDBI Bank Ltd.

India Forex Advisors Pvt. Ltd CEO Abhishek Goenka said RBI’s move implied that the central bank didn’t want to deplete its dollar reserves and hence was taking policy measures to prop up the rupee. This will cause overall trading to decline, he said.

“There will be a huge revenue loss to the banks which ultimately would be passed on the exporters and importers in their regular transactions. Exporters would be hit more since their flexibility in forex markets will be reduced," Goenka said.

The huge demand for dollars to meet the current account deficit and fiscal deficit is making the rupee vulnerable, said Goenka.

Currency dealers say the structural problems remain and unless the deficit concerns are addressed, the rupee will continue to slide against the dollar in the long run.

RBI last week took steps to encourage more dollar flows into the country by increasing rates on foreign currency non-resident accounts and giving banks the flexibility to raise overseas funds at any cost to lend to exporters.

“The RBI move is going to help in the short term by causing temporary reprieve," said Vivek Rajpal, India rates strategist at Nomura Financial Advisory and Securities (India) Pvt. Ltd. “It is going to lead to a meaningful flow of $2.5 billion in the next two weeks. Against the backdrop of global uncertainties and high current account deficit, the medium-term outlook appears grim, but a whole lot depends on how the global uncertainties shape up."

Potential gainers from the rupee’s depreciation are information technology companies that earn mostly in dollars and primarily spend in the Indian currency. A rising rupee impacts their margins. A single percentage point fall or rise in the rupee against the dollar either impacts or helps margins of these companies anywhere between 30 and 50 basis points, or bps. One bps in one hundredth of a percentage point.

However, tier-I Indian IT companies typically hedge against the dollar (most have done it at Rs47-48 to a dollar which will not help) while mid-tier and smaller Indian IT companies do not have the scale to hedge.

Even the jewellery sector will be hit badly in the short term. “Our inventory is in dollars and our payments are in dollars. However, our mark to market and borrowings from the banks are in rupees and as we are all quite leveraged in the short-term, the dollar appreciation impacts us. But in the long term, it would be beneficial as cost of business comes down," said Mehul Choksi, chairman of Gitanjali Gems Ltd, one of the largest integrated diamond and jewellery manufacturer-retailers in the world.

Sunil B.S. and Bloomberg contributed to the story