Rupee plunges to new low against dollar

Rupee plunges to new low against dollar
ENS ECONOMIC BUREAU

MUMBAI, MAY 10: The foreign exchange market on Wednesday plunged into a turmoil with the rupee plummeting by a whopping 40 paise to hit an all-time low of 44.05/07 against the US dollar. However, as expected by the dealers, the Reserve Bank of India (RBI) did not intervene to arrest the rupee fall, prompting dealers to term the Wednesday fall as a planned move by the central bank to weaken the currency.

The currency fall, though expected, surprised the forex market with its magnitude. The rupee was pulled down by nagging worries about slowing foreign portfolio inflows, drought, rising inflation, increasing dollar demand from importers and dollar purchases by the government to fund defence imports. Forex dealers said they expected the weakness to persist and the market to be jittery in the next couple of days after Wednesday's sharp 40 paise slide.

By evening, the rupee hit an all-time intra-day low of 44.08 per dollar, weakening sharply beyond the previous low of 43.70 hit in August 1998, and down from Tuesday's close of 43.6775/6825. With this fall, dealers expect the rupee to move into a lower trading band around 44.00-44.20 per dollar over the next few days. ``It must have been a planned move, because the pressure was building on the rupee to weaken," said a dealer.

In fact, as there was no good news to support the Indian currency, dealers say it was bound to weaken. The country is currently tackling a drought in five states. Stock markets have been weak amid concerns about the valuation of technology stocks, while inflation has been inching up. The wholesale prices inflation rose to 6.1 per cent in the week ended April 22 from 5.55 per cent in the previous week.

At Tuesday's close, the rupee was just 2.9 per cent lower than its March 1999 level. Foreign funds have been steady buyers of Indian equities despite the persistent stock market weakness, but dealers said the recent reversals in the flows had led to some concern. On Monday, foreign funds sold over $101 million worth of Indian equities, but for the calendar year to date net purchases amount to $ 1.6 billion.

Earlier in the day, dollar sales by the SBI, along with speculation that the Reserve Bank of India (RBI) would issue a statement supporting the rupee, braked the rupee's fall, dealers said. But with no RBI statement forthcoming, and the SBI, which surrogates for the RBI in supporting the Indian currency, joined the bandwagon of dollar buyers, the rupee's decline resumed. ``The market was surprised by SBI's move as it was expecting the SBI to sell dollars to prop up the rupee,'' a dealer at a state-run bank said. Some dealers said the SBI could be buying dollars for importers, notably, the oil companies for crude imports.

As far as RBI is concerned, the rupee's latest slide was unlikely to worry the bank as it has the market firmly in its grip. The rupee is not convertible on the capital account, and central bank rules restrict the scope for speculation in the market, keeping volumes fairly thin. The RBI espouses the view that the market can set the trend for the rupee, so long as the movements are moderate. The rupee's 3.3 per cent decline against the dollar since March 1999, reflects that approach.

The latest fall was also fuelled by slowing dollar inflows from foreign investors in Indian stock markets. ``If you look at the numbers for the past few months, the supply side for the dollar has really been from the foreign institutional investors. That is drying up now leading to an imbalance in demand and supply and that's what pressuring the rupee right now,'' dealers said. "The stock market weakness is beginning to have a bearing on the currency... the drought is a worry. Besides, Asian currencies are weaker," said a dealer.