Rupee hits record low

MUMBAI, MAY 8: The Indian rupee slipped to a new closing low on Tuesday on an unexpected bout of dollar buying by foreign funds and import...

MUMBAI, MAY 8: The Indian rupee slipped to a new closing low on Tuesday on an unexpected bout of dollar buying by foreign funds and importers which traders said could mark the start of a steady weakening process.

The rupee ended three paise lower at 43.6775/6825 per dollar on Tuesday, it slowest ever close.quot;It is nudging closer to all-time lows. I see the rupee8217;s trading band gradually shifting upwards,quot; said Munish Saigal, controller of foreign exchange operations at Ranbaxy Laboratories.

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 India8217;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 rupee8217;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 India8217;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.

quot;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,quot; Surendra Rosha, head of foreign exchange trading at HSBC Treasury, said.

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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 RBI8217;s behalf have been selling dollars to temper the rupee8217;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.