Rupee falls again despite RBI steps

MUMBAI, AUG 17: The Reserve Bank's support package has failed to stem the rupee's slide. The Indian currency was once again badly mauled b...

MUMBAI, AUG 17: The Reserve Bank8217;s support package has failed to stem the rupee8217;s slide. The Indian currency was once again badly mauled by huge dollar demand and fell by 20 paise against the US dollar at 45.89/90 after witnessing continuous gains in the last three consecutive trading sessions. The recent surge in global crude prices is set to widen India8217;s current account deficit, adding to downward pressure on the rupee, analysts said.

The Indian unit continued its fall throughout the day and finally closed at 45.89/90, showing a net fall of 20 paise from previous day8217;s close of 45.69/70.

It may be recalled that the rupee breached the psychological barrier of the 46 mark and tested an all time intra-day low of 46.08 on last Friday. However, it started showing signs of appreciation after the Reserve Bank of India RBI8217;s intervention which announced a 50 per cent reduction in exchange earners8217; foreign currency EEFC account. 8220;It was expected that the rupee may stabilise after the RBI8217;s announcement. However, the market moved in the opposite direction on rising dollar demand,8221; dealers said.

The RBI also directed EEFC account holders to convert their excess balances into rupees latest by August 23 and the market was expecting a supply of 2 billion.

Currency traders are worried that the firm trend in crude oil prices will push up importer demand for dollars in a market which is already short in supply of the US currency, adding to fresh downward pressure on the Indian currency, which hit record lows last week. quot;If oil prices continue to be firm, the pressure on the rupee will continue,quot; said V Ravikumar, chief foreign exchange dealer at ABN Amro Bank in Bombay.

Ravikumar said policy changes towards oil imports would also add to pressure on the rupee as demand would be less staggered. Since January, the rupee has lost slightly more than five per cent against the dollar after depreciating by around only two per cent in the whole of 1999.

The currency8217;s fall came despite a stack of central bank measures to check its slide. These have ranged from depleting its foreign exchange reserves to improve dollar supply, tightening domestic money market liquidity and pushing up short-term interest rates.

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They said the 2000/01 April-March net oil import bill could jump to 16 billion from 12.3 billion the previous year if the current firm trend in global crude prices continued. The impact on the current account will, however, be cushioned by strong export growth, particularly of software and related services, analysts added. India8217;s current account deficit in 1999/2000 was 4.16 billion.

Meanwhile, credit rating firm Crisil has warned that the raising interest rates and tightening money supply at this juncture to contain exchange rate volatility may hurt industrial production and lead to inflationary pressures in the economy.

It has stated that direct intervention of the RBI in the foreign exchange market to contain rupee-dollar volatility sale of dollars in the market led to frequent spurts of tightening of rupee liquidity especially since May. As a result, yields in the money markets have been consistently rising across all maturities.

Crisil further stated that an upward movement in the yield curve since end-April highlights that interest rates were rising much ahead of the recent monetary measures of RBI hike in CRR and bank rate. Although the pressure on interest rates was building up, it was the sharp volatility in the rupee-dollar exchange rate that proved to be the catalyst in RBI8217;s package of measures in July, the rating agency said and pointed out that the policy changes announced by RBI strongly suggest that the immediate concern of the monetary authority is to contain the volatility of the exchange rate and ensure that there is no further widening of the mismatch of supply and demand for dollars.