MUMBAI, APRIL 6: The political chaos at the Centre shook the foreign exchange market on Tuesday with the rupee hitting a seven-month low and declining sharply by 25 paise to 42.68/70 against the US dollar.The rupee had at one stage plunged to the 42.78 level - showing a loss of 35 paise from the previous level of 42.43 - but closed higher at 42.68/70 as the Reserve Bank of India (RBI) intervened in the market and pumped in around $ 50 million in support of the rupee when the rupee touched the level of 42.78 level. 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 further fall in the rupee value.This is the first time the rupee is showing a huge volatility against the dollar this year. The rupee reported the level of 42.82/92 on August 20 last year. The forex market, which remained almost quiet as the rupee too witnessed steady movement against dollar for last couple of months, thanks to arelatively industry-friendly budget and policies of the government, suddenly turned volatile after the AIADMK's decision to withdraw its ministers from the government, indicating severe threat to the survival of the Vajpayee government.The statement of Finance Secretary Vijay Kelkar about a depreciation of the rupee on Monday also put pressure on the rupee. Kelkar had hinted at a depreciation of the rupee to spur exports through a more pro-active exchange rate policy.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 amount of it at the higher level, dealers said. The previous occasion the rupee ruled this lower level was on August 20, 1998 when it opened at 43.50 and closed at 42.68.The decline accelerated on dwindling prospects that the AIADMK would decide to stay in the coalition. "Now it is a repetition of the situation we had in January 1998 andAugust 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 over the political situation spread."Ultimately, the rupee will retrace part of the losses by tomorrow," dealers said, adding, ``in the short term, the rupee would not be affected by the political uncertainty but over a longer timeframe, there could be pressure on the currency to weaken if foreign investors took fright.'' ``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 thepolitical 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.
