Mumbai: The rupee entered uncharted territory on Wednesday, slipping below the psychological resistance level of 60 as the Reserve Bank of India gave up defending the local currency at the 59.98 level —a position it had been holding for several days through intermittent dollar sales. The rupee which tracked global cues weakened as the dollar gained against most emerging market currencies.
The local currency, which opened to highly volatile trade after closing at 59.68 on Tuesday, saw the exchange rate slip beyond 60 in afternoon trade only to settle at the day's low of 60.73. The sharp fall of the rupee led to a corresponding fall in bond prices as well as a 77-point fall in the sensex. Similarly, prices of gold hit a one-month low in the bullion market following a global crash in the precious metal while silver hit a twoand-a-half-year low. Besides making all imports expensive, a weak rupee will severely hurt those planning to travel or study abroad. However, some bankers say that the inflationary impact of a weak rupee would be softened by a crash in international commodity prices including oil and gold. But this has almost eliminated hopes of a rate cut by the RBI in its monetary policy review next month.
Gold, silver prices fall on global cue Gold prices slumped to a one-month low, to Rs 26,145 per 10g on Wednesday, on the back of a steep fall in global prices while silver dropped to a three-year-low, at $18.63 an ounce. The slide set in on reports that the US was withdrawing its stimulus programme.P 20 'Problems global, solutions local'
Foreign exchange dealers said Wednesday's fall of the rupee was triggered by month-end demand for dollars. Once the rupee crossed the 60-level it triggered stop-loss positions among buyers who rushed in to cut losses, thereby pushing the rupee down even further. Whether the rupee continues to slip or rallies on Monday would depend on how the dollar moves against the euro late on Wednesday.
The crash in the rupee has exposed the central bank's weakness in defending the rupee through dollar sales. Dealers said that the market took the opportunity to test the level to which RBI would go by bidding aggressively for dollars. Late evening, RBI sought to hit back on speculative buying by asking banks to verify that foreign institutional investors are buying dollars in the forward markets only to cover their underlying positions in equity markets and not for speculative purposes.
If the rupee steadies at levels above 60 against the dollar, as some traders are forecasting, there will be immense pressure on the economy as import bills soar. Companies will face problems as their foreign debt burden would have risen 10% in less than a month. Importers who cannot pass on their increase in costs will come under strain. But bankers are hopeful that this is an aberration and the local currency would return to sub-60 levels in the medium term. "The rupee has depreciated beyond what the REER (real effective exchange rate) would suggest. There should be a correction above 60 is not fundamentally where it should be" said Shikha Sharma, MD & CEO, Axis Bank. The REER is a rate that is derived by comparing India's currency relative to a basket of other major currencies after making adjustments for inflation.
Bankers say that although the problems are global the solutions are local. The only way to strengthen the currency, they say, is to speed clearance of stuck projects which can restore confidence in equity markets and restore capital flows from foreign institutional investors.
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