Chaos at Centre sends Re into tailspin

In early trades, the rupee opened lower at 42.44/46 and moved down further due to panic greenback buying by importers, fearing the collapse of the government and a further fall in the rupee value.

This is the first time the rupee is showing a huge volatility against the dollar this year. Today’s rupee fall is the sharpest after hitting an all-time low of 43.70 in August last year, which forced Reserve Bank of India governor Bimal Jalan to announce a stiff package of measures to arrest the slide of the Indian currency.

The forex market — which was mostly quiet with the rupee too witnessing steady movement against the dollar for the last couple of months, thanks to a relatively industry-friendly budget and government policies — suddenly turned volatile in the wake of AIADMK chief Jayalalitha’s decision to withdraw two ministers from the government.

Finance Secretary Vijay Kelkar’s statement on Monday hinting at a depreciation of the rupee — to spur exports through a more pro-active exchange rate policy — also put pressure on the currency.

Dealers said the market witnessed a panic dollar-buying spree by corporates at various levels. State Bank of India (SBI) which was seen buying the dollar at the lower levels in the morning, sold huge amounts of it at the higher level, dealers said.

The decline accelerated with prospects of the AIADMK deciding to remain part of the coalition dwindling. “Now it is a repetition of the situation we had in January 1998 and August 1998… more and more importers rushing in to cover and pushing the rupee to lows,” said the chief dealer of a private bank.

While the central bank has clamped down on inter-bank speculation against the rupee since it fell to all time lows of 43.70 last August, importers were at the forefront of dollar buyers as alarm at the political situation spread.

The rupee will however retrace part of the losses by tomorrow, dealers said, adding that in the short term, the rupee will not be affected by the political uncertainty, but, over a longer time frame, there could be pressure on the currency to weaken if foreign investors panicked.

“In the short term, the RBI has got enough ammunition to handle any pressure on the rupee,” said P H Ravikumar, executive vice-president at private sector ICICI Bank, referring to India’s foreign exchange reserves which stood at a record $31.586 billion on March 26.

“But there could be pressure in the longer term if foreign investors take fright because of the political uncertainty,” Ravikumar said. “Dollar demand is strong. Bids for less than one million dollars have not been seen all day,” said one foreign exchange broker.

“This uncertain phase will continue for some time until the actual outcome is known. Corporates are suddenly not so comfortable with keeping import exposures open,” said a dealer at Banque Nationale de Paris. Small corporate dollar sales were seen at levels above 42.60 but there was no sign of any central bank enquiries to stall the rupee’s decline, dealers said.