The rupee breached the psychologically crucial 54-level against the US currency on Tuesday but recouped losses to end higher at 53.79 on huge dollar selling by the Reserve Bank of India (RBI) to prop up the currency.
Intervening aggressively in the forex market,state-run banks,acting on behalf of the RBI,sold $400-$500 million as the rupee touched its second lowest intra-day level of 54.15. It had recorded historical intra-trade low of 54.32 on December 15,2011.
The sentiment improved on the RBI intervention and the rupee finally settled at 53.79,showing a gain of 17 paise from its overnight close.
The RBIs recent fight to defend the rupee has had muted success,with the currency hitting record closing lows on a daily basis despite several administrative measures as well as selling of dollars in the market by the central bank. Over the last week,the RBI directed exporters to sell half the foreign currency in their accounts and made it easier for the market to absorb large foreign exchange transactions.
The rupee has lost nearly 9 per cent against the dollar since the start of March and is expected to remain under pressure amid global risk aversion and worry over Indias large current account and fiscal deficits and sluggish policymaking by the government. Foreign exchange reserves have been dwindling and can now pay for just six months of imports,limiting the RBIs ammunition to defend the rupee. It is thus expected to take further administrative measures to prop up the currency.
The RBI is offsetting the impact on rupee liquidity from its dollar sales by purchasing bonds via open market operations. On Monday,it said it would buy up to Rs 12,000 crore in debt on Friday,its second open market operation (OMO) in as many weeks.
The rupee had been falling steadily for the past many days due to fundamental weakness in the economy like higher current account deficit. Besides,a worsening global risk environment has pounded the currency,forcing the RBI to also adopt various measures.
There was huge selling of dollars in the market after the rupee opened beyond Rs 54 level. But the rupees gain is temporary as it remains fundamentally weak and is likely to trade 55-58 range over the next 12 months, said a dealer.