Rupee plunges below 46, bounces back

The RBI initiatives boosted the market sentiment with the Indian rupee registering an impressive recovery on the hopes of easy dollar supply, bankers said. Earlier in the day, the Indian currency opened in a wide range at 45.85/90 per dollar, and breached the psychological barrier of 46 mark within 45 minutes of the opening of trading. Soon after the RBI directives to the banks, the rupee bounced back to 45.75 per dollar and finally closed to 45.80/81 per dollar, showing a net gain of nearly five paise from the previous close of 45.85/87 per dollar.

The rupee is still some 5 per cent weaker against the US currency since the year began although it has appreciated against other major currencies. The rupee, convertible only on the current account, is expected to remain under pressure due to a slowdown in foreign capital inflows and a widening trade deficit.

Analysts say India’s balance of payments is likely to be square at the end of the current financial year in March, after four successive years of surplus. In the latest fall, the rupee has hit fresh lows each day this week excepting a brief rally on Wednesday. An unexpected inflow of dollars from corporate sources on Wednesday helped the rupee rally and had held out hopes the currency would settle in a range in the short term. But with importers returning to buying dollars on Thursday, that respite proved short-lived.

"Exporters who had booked their dollars earlier were cancelling and there was forward demand from importers till Thursday," said an analyst. Traders said dollar supplies have almost vanished from the market, with exporters holding out for better realisations in anticipation of further falls in the currency.

Some traders hope that foreign portfolio inflows will pick up in August — so far foreign funds have bought equities worth a net $114.9 million in August after two months of heavy outflows worth nearly $550 million. "The general mood has improved following expectations of a more stable US interest rate environment which will help re-route the flow of foreign capital into the Indian stock market," said a forex dealer.

But most traders expect foreign funds to remain on the sidelines till a clearer picture emerges on US interest rates and the rupee stabilises. That leaves only foreign direct investment inflows and the central bank’s foreign exchange reserves as sources of supply. The RBI has said it is prepared to help bridge demand-supply mismatches.

Reserves have already fallen more than $2.0 billion from a peak of $ 38.341 billion in mid-April, partly reflecting the central bank’s attempts to improve supply in the face of a bunching up of import demand. Current reserves are still sufficient to cover around eight months’ imports.

The RBI has squeezed domestic money market liquidity and pushed up interest rates to support its currency. The RBI had hiked the bank rate and cash reserve ratio on July 21 in a bid to stem the rupee fall. "These measures are expected to do a prop-up job until the demand-supply mismatches are settled and dollar inflows resume," said an analyst at a foreign bank.