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In bad times, Rupee has few friends

Posted on 25 May 2021,    
 3681    Share  Report

From many takers at 40.5/$ last September, the currency is finding few at 44.5/$ now

Author : Joel Rebello/DNA

Last September, when the rupee was at 40.69/$ and rising, exporters rushed to sell their dollars and buy rupees. Its ironic that just a year later, the Indian currency doesn't find many takers in the foreign exchange market.

As the rupee dropped to 44.62/$ on Monday, pressured by dollar demand from oil companies and weak inflows into the stock market, exporters were also nowhere to be seen. After gaining 10.3% to end 2007 around 38.42/$, the rupee has struggled in 2008.

So far this calendar year, the currency has dropped 16% and is threatening to end the year at 45/$ or below, a level last seen in 2006.

Forex dealers say the rupee is likely to weaken to 45/$ and beyond as the dollar continues to gains strength overseas and inflows are not expected to recover soon.

Rohan Lasrado, head, interbank foreign exchange, HDFC Bank, said the revival of inflows will be crucial if the rupee is to have any chance of a bounce back. "There are no fresh inflows and there is also demand from the oil companies. Clearly, supplies are dwindling. Only the Reserve Bank can help the rupee from here," he said.

RBI has been absent from the forex market, despite the same witnessing volatile recently.

For example, on Monday the rupee opened higher and reached 44.12/$, helped by a strong start to global equity markets. However, demand from oil companies and a shortage of dollar supply pushed the US currency up to 44.62/$ at the end of trade.

V Rajagopal, chief dealer at Kotak Mahindra Bank, says the global currency volatility are impacting the rupee, and that the problem is being complicated because of domestic macroeconomic issues.

"High inflation and current account deficit is pressuring the rupee. Also, the dollar has gained against other major currencies because the Federal Reserve has stopped rate cuts," he said.

After cutting its key rate seven times since last September, the Fed held the rate in the last two meetings, boosting the value of the dollar. Forex dealers now expect a quick fall for the rupee to 44.80/$, before it dips further to touch 45/$.

Expectations are that RBI will support the rupee, but the Indian currency will remain weak till year-end. JP Morgan analysts Siddharth Mathur, Vikas Agarwal and Gunjan Gulati in a note on September 4 retained their end-2008 forecast at 45/$, while acknowledging upside risks to the dollar if RBI's dollar sales stay modest.

"If expectations shift for prolonged INR weakness, the ensuing adjustment can be swift, sharp and potentially disruptive. The RBI might slow the rise in USD/INR. We believe the RBI is mindful of such risks and might act to moderate the impact. Still, it is unlikely to reverse direction on USD/INR if the drivers for INR weakness are continued reversal in capital inflows, still widening current account deficit and broad-based USD strength," the analysts said.

Subramaniam Sharma, a forex consultant at Greenback Forex, said demand for dollars from importers and macroeconomic factors will continue to pressure the rupee: "It is ironic that exporters were trying so hard to sell dollars at 40/$ and now when the rupee is at 44.60 nobody is selling. Exporters will have to take the call in sometime."



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