Rupee hits record low; RBI steps in 'mildly'

MUMBAI Thu Jun 21, 2012 5:22pm IST

1 of 2. An Indian one rupee coin is seen in this picture illustration taken in Mumbai April 30, 2012.

Credit: Reuters/Vivek Prakash/Files

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MUMBAI (Reuters) - The rupee fell to a record low against the dollar on Thursday, as the euro and other risk assets were hit by disappointment about the size of bond purchases announced by the Federal Reserve and by weak global economic data.

The Reserve Bank of India made what traders described as a "mild" attempt at defending the currency early in the session, and some traders said it may have acted again after the currency briefly surpassed the previous record low hit on May 31.

Just like in May, when the rupee tumbled to a string of record lows, renewed global risk aversion has been the spark for the falls in the rupee, but the decline has been sustained by the deep uncertainty about India's fiscal and economic outlooks.

"The RBI's intervention and policies to mitigate the weakness is not the silver bullet to what really is a structural weakness for the currency; i.e. the twin deficits," said Nizam Idris, head of Asian fixed income and currencies at Macquarie Bank.

Idris expects the rupee to gradually weaken to 57.5 to the dollar over the next month, though adds a sharp weakening will be prevented as importers and oil companies may have covered most of their hedging needs for the months ahead.

The rupee fell at one point to a record low of 56.55 to the dollar, surpassing its previous 56.52 low.

However, the local currency recovered losses on the back of rallying domestic equities to settle at 56.30/31 versus its 56.15/16 close on Wednesday.

Global markets weakened on Thursday after the Fed extended its current bond-buying programme by less than some investors had hoped, while weak factory data from China and a contraction in the euro zone's private sector contributed to the falls.

The rupee will remain vulnerable to any flare-ups of global risk aversion, while also subject to domestic challenges.

The one-month offshore non-deliverable forward contracts closed at 56.71 while the three-month closed at 57.46, implying further losses ahead.

The RBI disappointed domestic markets by keeping interest rates on hold on Monday, the same day when Fitch Ratings cut the country's outlook to "negative", becoming the second credit agency to threaten India's investment grade rating.

Fitch and S&P have highlighted the growing unease from investors about the lack of visible reform moves by the government despite a toxic macroeconomic cocktail of slowing growth and high inflation.

The focus has shifted to the government, which faces a daunting task of reviving faltering economic growth while ensuring its current account and budget deficits do not widen any further.

Reserve Bank of India Governor Duvvuri Subbarao this week said the central bank will continue to intervene in the currency markets to curb volatility, blaming the rupee's falls on both global and domestic factors.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 56.4225 on a total volume of $5.6 billion. (Reporting by Subhadip Sircar; Editng by Rafael Nam)

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Comments (1)
KOHIMAVITTAL wrote:
RBI was mainly responsible for the present rapid slide of the Rupee due its failure to contain and control inflation.Inflation which started to raise its ugly head in early 2009,RBI by its baby steps pushed itself behind the curve and allowed inflation to get better of RBI.Due to the pressure from India Inc. & Finance Ministry the interest rates were kept at abysmally low levels which also created speculative trades too and credit going to unproductive sectors.In the name of growth, inflation targeting was totally neglected which is the main reason for the Rupee sliding to match the inflation rate.So there is likely hood of further slide and if it has to find its REER,it will go down upto 66.If RBI takes steps to match the rate to match inflation rate and able to provide positive returns to the depositors, then only rupee will be strengthened.So if rupee has to become strong RBI has to raise interest rates instead of cutting which will be strongly opposed by India Inc.Had the RBI raised rate at 1% instead of 25Bps,it would have had lot of leg room to raise rates at the very same rate it raised. Its catch 22 situation of RBIs own making.Former Deputy Governor of RBI,Sri.KK.Tarapore and some impartial observers were critical of RBIs baby steps and warned of the situation getting out of control and the same has happened now.We should not waste our hard earned foreign exchange to rescue the rupee.Let the rupee find its own value as per market situation than artificially shielding

Jun 22, 2012 1:48pm IST  --  Report as abuse
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