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Indian rupee plunges to historic low of below 64.52 against US dollar,RBI helpless

Heavy dollar buying from state-run banks along with demand from custodian banks hurt rupee.

The Indian rupee plunged to a record low on Wednesday on heavy dollar demand by importers and as traders fretted over mixed signals from the central bank over its efforts to prop up the currency without choking off economic growth.

The Indian rupee fell nearly 2 percent to a record low of 64.52 to the US dollar despite what traders said was sporadic central bank intervention in both the spot and forward markets.

Measures by the Reserve Bank of India (RBI) late on Tuesday to support longer-dated credit sent prices of beaten-down bonds sharply higher but also led traders to question the central bank’s resolve in defending the currency.

Since mid-July,the RBI has taken steps to tighten cash conditions,which have failed to support the Indian rupee but sent bond yields surging,posing a fresh threat to the already cooling economy.

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“Currency market and participants may consider it as a reversal of RBI liquidity tightening measures to prevent currency volatility; thus some pressure on currency may re-emerge,” said Anjali Verma,economist at PhillipCapital.

With a record high current account deficit at 4.8 percent of GDP,India is especially vulnerable to funds moving away from emerging markets in anticipation of a winding back of the U.S. Federal Reserve’s stimulus programme. Traders were looking ahead for clues from Fed minutes to be released later on Wednesday.

Deutsche Bank said in a note on Wednesday that the Indian rupee could slide to 70 in a month or so,although some revival is expected by the end of the year.

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The central bank’s move to ease cash conditions after tightening them last month to support the Indian rupee highlights the growing costs to the economy of stabilising the currency.

“The bearishness seen across markets is largely a reflection of the fact that there is no quick fix solution to arrest the Indian rupee fall,” said Shakti Satapathy,fixed income strategist at AK Capital.

The yield on the benchmark 10-year bond tumbled as much as 69 basis points (bps) on Wednesday to 8.21 percent as its price rose. It was last trading at 8.46 percent,still down 44 bps on the day.

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Local stocks turned negative,with the benchmark Sensex closing down 1.9 percent.

HIGHER BORROWING COSTS

Bond yields had risen 135 bps as of Tuesday’s close since the RBI first started tightening market cash conditions in mid-July by raising short-term rates to keep Indian rupee speculators at bay.

Still,the Indian rupee is down 7 percent since then.

The RBI said late on Tuesday it will buy 80 billion Indian rupees ($1.26 billion) of bonds on Friday and will pare down its cash management bill sales as its target of pushing up the overnight rate to the central bank’s emergency funding rate of 10.25 percent had been achieved.

The RBI relaxed rules on mandatory bond holdings for banks,known as the statutory liquidity ratio,which will help protect lenders from large mark-to-market losses.

While banks had previously been asked to cut their hold-to-maturity bond holdings gradually to 23 percent of deposits,the RBI on Tuesday allowed banks to retain them at 24.5 percent of deposits.

First published on: 21-08-2013 at 09:56:49 am
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