Rupee hits record low

It is within striking distance of its all-time intra-day low of 43.70, struck in August 1998 after economic sanctions were imposed on the country following its nuclear tests.

But the drop was checked by the State Bank of India (SBI) which sold dollars towards the close. The SBI often acts on behalf of the central bank.The Reserve Bank of India’s firm control over the currency has ensured the rupee barely moved in the past 15 months. At current levels, the rupee was just 2.9 percent lower than levels at the end of March 1999.

The rupee’s stability in the past year has given the market a lot of confidence, yet an ongoing drought in five states, stock markets struggling to recover from lows and the threat of higher US interest rates have all weighed on the currency.

The drought, said to be the worst in 100 years, has given rise to fears agricultural output and rural incomes may falter, undermining India’s fledgling consumption-led industrial recovery. Stock markets have already suffered. Investor confidence has been low and there have been global concerns about the valuations in the technology sector.

"The stock market reflects there may be demand (for dollars) in the near-term. But there is not much scope for the rupee weakening beyond a paise a day," Surendra Rosha, head of foreign exchange trading at HSBC Treasury, said.

Foreign portfolio flows totalled $1.78 billion so far in 2000, compared with just $1.5 billion in all of 1999, and there are concerns flows to the emerging economies could reverse after the United States hikes rates again this month.

India, despite its large internal economy, could also suffer from the partial withdrawal of such flows. The market has for a long time been heavily overweight on dollar inflows, most of which the Reserve Bank of India (RBI) absorbed.

But the past few weeks have been different. State-run banks, believed to be acting on the RBI’s behalf have been selling dollars to temper the rupee’s slide. Foreign exchange reserves were at highs of $38.341 billion on April 14, but slipped to $37.975 billion by the last week of April.