Indian Rupee Falls-VRK100-15Sep2011

Indian Rupee Falls

Rama Krishna Vadlamudi, Hyderabad 

15 September 2011  

                      

The Indian rupee has touched a two-year low against the US dollar. One dollar was fetching Rs 44.74 on 5 August of this year when Standard & Poor’s downgraded US credit rating by one notch. Now, after nearly six weeks, one US dollar is quoting at Rs 47.65 – the closing price on 14 September recovering from an intra-day low of Rs 48.01. What this means is that dollar has become more expensive by around three rupees or 6.5 per cent. Considering that the dollar-rupee exchange rate was not very volatile in recent times, the steep depreciation of Indian rupee against US dollar is quite surprising.

What caused the	At present, there is dollar shortage in the market, not
rupee to fall	only in India but across the world. The dollar has started
against the dollar?	appreciating against the Euro, pound sterling and other
	major currencies in the past two weeks. Foreign Institutional
	Investors have sold $1.7 billion (Rs 7,670 crore) worth
	of equity investments in Indian stock market in the last
	six weeks.
	However, market experts say the Indian rupee is
	falling due to weak growth in India's national income,
	dollar buying by oil marketing companies for their oil
	import and technical factors. Foreign exchange
	traders may be resorting to arbitrage for short-term profits.
What factors may	The global uncertainities caused by sovereign debt crisis
work against the	in the US and euro zone.
rupee in the	Growing current account deficit (imports more than exports).
short-term?	More selling by FIIs in Indian stock market.
Whether RBI will	It is difficult to tell whether or not RBI will intervene
intervene?	to buy or sell dollars in the forex market. Between
	July 2009 and July 2011, RBI's intervention in the market
	was practically nil. RBI resorted to buying and selling of
	US dollars heavily and routinely between Nov.2006 and
	June 2009.
	However, there are market rumours that the RBI had
	intervened in the market on 14 September to stop the
	rupee from falling beyond 48-level.
	RBI in public says the rupee value is determined by the
	forces of supply and demand. However, if the volatility
	is too much in the markets, they will definitely intervene.
	Sometimes, mere statements from RBI will do.
What is the impact	Obviously, the biggest beneficiaries are exporters provided
of rupee fall on	they have kept their positions open. However, importers
the markets?	are negatively affected as they have to pay more rupees
	for the same dollar when rupee falls or dollar goes up.
	In general, exporters and importers cover their positions
	through forward contracts and other derivatives.
	The stock prices of software majors, like, TCS, Infosys
	and HCL Technologies have gone up on 14 September.
2007 losses	In 2007, rupee appreciated against the dollar up to
	39-level which was not anticipated by Indian companies.
	These Indian companies suffered heavy losses of up to
	Rs 20,000 crore as they bought wrong types of hedging
	instruments from banks.
What factors may	Strong exports growth which are doing well of late.
support rupee in	Indian Interest rates are higher than those in the US.
the medium term?	Interest rates are rising in India while US stagnates.
	If some stability comes to the markets from euro zone.
Whether rupee will	Financial markets always caught us unawares either on
touch 50-level?	the upside or on the downside. When rupee is falling
	suddenly, everybody will try to buy dollars creating
	short-term aberrations. It will take some time for the
	markets to stabilize. Till then, we need to be watchful
	and expect the unexpected. Expectations about future
	interest rates and exchange rates play a major role in
	the markets. RBI is expected to raise Repo rate by
	25 basis points (0.25%) during the 16 September meet.

References: SEBI and RBI

Disclaimer: The author’s views are personal. There is risk of loss in trading. Readers need to consult their financial advisor before taking any trading positions in the markets.

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