RBI may take big bang steps to tame rupee Currency Hits New Low Of 55.47 Against $

Mumbai: The foreign exchange market is bracing itself for sledgehammer measures by the Reserve Bank of India given the sharp depreciation in the rupee in the last few sessions. The rupee further weakened against the dollar to close at 55.40 after hitting 55.47 intra-day on Tuesday following a downgrade of Japan by rating agency Fitch. 

    The rupee, which opened stronger against the dollar, soon started weakening steadily to close at the day's low. Dealers said that none of the central bank's measures to steady the rupee have had an impact. RBI has exhausted close to $20 billion of its reserves in supporting the rupee. It has allowed corporates to pay more on external borrowings, freed interest rates on non-resident deposits, and cracked down on banks going long on the dollar. 

    The most recent measure by RBI was curbs on trade in currency derivatives. Yet the rupee continues to weaken largely on the back of a world-wide dollar rally. 

    The most drastic measures could be limits on dollar purchases which could reduce pressure from importers. It was also widely expected that the central bank would open a separate window to sell dollars directly to oil companies thereby eliminating a large chunk of demand. 

    Besides increased demand for dollars from exporters who are leaving no position "unhedged", the local unit is coming under pressure because of sales by foreign institutional investors who turned net sellers in April 2012. 

    Forex dealers are waiting for the outcome of the Greek election on June 17 which will provide a pointer to whether Greece would continue to remain in the Eurozone. The main concern of the markets is of a disorderly exit—one where there is complete confusion over financial contracts with investors being forced to write off billions. According to Nick Firoozye, Senior Interest Rates Strategist, Nomura, the Greek exit from the euro would be not at all orderly. "Approximately 20% of the world's reserves are in euro, and a larger notional amount of euro swaps are traded that that of than dollar. That is a significant underpinning of the global financial market. An exit would almost automatically be disorderly: you would need to determine the governing law of individual contracts and obligations; whether redenomination is allowed or whether default is inevitable on some, as well as the obligations of central banks and governments. These issues are not at all straightforward —we can try and be as prepared as possible but it is not going to be easy in any way." 

GREXIT DILEMMA

Siddhartha Sanyal | Chief India economist, Barclays 

On Greek exit: The rupee is set to stay under pressure in a risk-off scenario and even a Greek exit from the euro will not improve it in the near term. The hopes of the rupee being favoured with oil prices coming off have not materialized and the only way out at the moment for the rupee seems to be further policy intervention 

On rupee: The exchange rate will be 56 by next month and 54 in three months

Dharmakirti Joshi | Chief economist, Crisil 

On Greek exit: Nervousness in Europe increases volatility in the forex market. We do not know how the situation will unfold in Greece... but the general result would be risk-aversion. The bad news is that our trade deficit is very high and most of our imports are price-inelastic. The good news is that the forex reserves and financial institutions are strong and, with 

    depreciation, Indian 

    assets become 

    attractive 

On rupee: The rupee could firm up to 49 in 8-10 months if there are measures to bring stability to the currency

Shubhada M Rao | President & chief economist, 

Yes Bank 

On Greek exit: The lingering Eurozone concerns may see another bout of intensification (of pressure on the rupee) around mid-June... If Greece fails to come to a consensus, the risk-off environment will prevail. The piecemeal measures and direct intervention by RBI have not been able to arrest the rupee's slide... Perhaps, an incisive and bigbang approach is needed now 

On rupee: The fair value of the rupee should be in the 52-53 range