Re ends at record low of 53.96 vs $ RBI Intervention Fails To Halt Slide, Inflation Weighs On Pro-Growth Policy

Mumbai: The rupee plunged to close at a new low of 53.96 against the dollar despite intervention by RBI following high inflation numbers. Dealers are now waiting for the currency to test its all-time low of 54.3 seen in December 2011. 

    Dealers said that the currency weakened after high inflation numbers reduced the possibility of RBI coming out with a pro-growth policy. There was also a global demand for dollars after it became increasingly likely that Greece would drop out of the euro zone – a development which weakened the euro. 

    The rupee dropped to a low of 53.92 in intra-day trade, sharply lower from its Friday's close of 53.64, when RBI is believed to have intervened by selling dollars. Although RBI's dollar sales pulled the rupee to 53.82, the respite was temporary and the domestic currency slid to close at a low of 53.96. "We will probably see the all-time low of 54.3 levels being taken off on Tuesday and this could be the trigger for exporters to come in. It would take a very bearish exporter to expect the rupee to settle below its historic low," said Harihar Krishnamoorthy, treasurer, First Rand Bank. He added that there was unlikely to be any panic buying by importers as most would have booked their contracts earlier. 

    With the growth coming under threat, many dealers had been betting on a rate cut to improve sentiment. Monday's inflation data reduces chances of any immediate reduction in rates. "Even though downside risks to growth continue, inflationary pressures remain on the upside. A weak currency, suppressed inflation and fiscal slippages could be some of the factors restricting the RBI's ability in cutting policy rates even if demand side pressures subside," said Indranil Pan, chief economist , Kotak Mahindra Bank. Chances of a rate cut have also dimmed with bank deposits showing sluggish growth which is not even enough to keep up with credit demand. 

    According to Krishnamoorthy, the rupee is probably undervalued at its present level and if the central bank was able to bring in some stability, the currency could firm up. 

    "The Rs 12,000-crore bond buyback announced by RBI will give the central bank headroom to sell up to $2 billion in the foreign exchange market without drying up rupee liquidity," he said. 

CURRENCY CONUNDRUM 

Why did the rupee weaken? 

    High inflation numbers have weakened chances of a pro-growth monetary policy. This could hit investment flows. Second, there are high chances that Greece may exit the euro zone which has pushed up global demand for dollars. Third, there has been a meltdown in asset prices, including crude, gold and platinum which could have increased import demand. 

Where will it settle down? 

    Dealers say that the rupee is probably undervalued at present levels. One simplistic measure of valuation is the Big Mac Index according to which a McDonald's burger is the cheapest in India. With RBI support there is likelihood that traders may start selling dollars once it touches the new peak 

Why should RBI support the rupee? 

    Inflation — already high — will shoot up if the rupee continues to weaken. A volatile rupee would also dissuade foreign investors on fears of their investments losing value 

Who gains by the weak rupee? 

    Exporters, manufacturers of import substitutes, nonresident Indians stand to gain. Whereas those planning foreign trips, students and anyone buying imported goods will have to shell out more rupees 

INDIAN CFOS' TAKE ON GROWTH PROSPECTS 

t45% view exchange rate (Re) instability as biggest threat 

t66% to make changes to risk management and hedging practices 

tThree fourth set aggressive growth targets in 2012 with 91% confident of meeting their growth targets 

t60 % say their growth prospects will depend on domestic sales than on exports 

t47% not inclined to tap their cash reserves over the next year 

t63% expect to increase spending on travel to meet customers 

t86% feel optimistic about economic expansion 

t57% planning to add jobs Source: American Express/CFO Research Survey