Will rupee become senior citizen? RBI says no

Saikat Das
moneycontrol.com

The exchange rate volatility continues to upset the applecart of Indian economy. The Indian rupee on Thursday hit a record low at 59.98 against the US dollar prompting the Reserve Bank of India (RBI) to check its freefalling. Finally, the local currency closed at 59.57 against the greenback, nearly 1.50 percent or 87 paisa lower than the Wednesday close at 58.70 percent.

Also read: Here's why bond market trading was suspended for 45 min

RBI intervention

RBI intervened at 59.90 level through four state-owned banks including Bank of Baroda, State Bank of India, Bank of India and Union Bank of India, which were seen selling dollar, traders said. The intervention may be to tune of 200-300 million dollar. The central bank is believed to be protecting the 60 mark, the age to qualify for a senior citizen.

FII put-out

Globally investors are pulling out from emerging markets like India even as US Federal Reserve on Wednesday hinted at cutting of liquidity easing if economy improves. Fed chairman Ben Bernanke said that by the end of this year, its quantitative easing (QE), a method to inject more money into the financial system, would start tapering.

Hence, the fountain of liquidity is likely to ebb. The quantum of QE remains at USD 85 billion per month.

The pressure on rupee, according to Moses Harding, head of asset liability committee and economic market research, IndusInd Bank; is severe from FII pull-out from debt market as the differential between India and US Treasury yield squeezes.

Exporters' greed

"Sharp depreciation in quick time has pulled importers' fear and exporters' greed syndrome. At the same time, the absence of credible actions and measures from the government to arrest accelerated rupee fall. More importantly, lack of optimism on the economic uptrend erodes investor confidence and sentiments," he told moneycontrol.com.

NDF and the play of arbitrage

It is learnt that there was tremendous pressure on rupee caused by play in off-shore non deliverable forward (NDF) market, where forward dollar trades at higher premium. Rupee was trading around 60.90 against the US dollar in the 3-month non-deliverable forward contract.

"Some traders are buying dollar here in India and selling in the NDFC market. Thereby, they are taking advantage of arbitrage to the tune of 15-20 paisa. This is hurting genuine investors," said Naveen Raghuvanshi, associate vice president at Development Credit Bank (DCB).

Banks with registered office outside India can only trade in NDF market. Hence, public sector and private sector lenders are not allowed to trade in that market.

FinMin to smooth ruffled feathers

Meanwhile, the finance ministry too stepped up to smooth ruffled feathers in the currency market by saying that the government is not running short of options to check rupee's slide.

Also read: Market should not dictate govt policies: Raghuram Rajan

"We have a range of instruments. We can call on them as and when needed. We will not flag them. The ministry of finance, RBI (Reserve Bank of India) and SEBI (Securities and Exchange Board of India) are watching developments closely and take action appropriate. We should not let ourselves to be led by the market into directions we do not want to go," said Raghuram Rajan, Chief Economic Advisor in the Finance Ministry in New Delhi.

saikat.das@network18online.com