‘More steps are needed to either curtail the CAD or finance it’

Stock indices tumbled on bourses as the rupee touched its record low of 61.80 a dollar intra-day in the foreign exchange market here on Tuesday. The fall in stock indices was also aided by poor quarterly numbers announced by corporates.

The benchmark S&P BSE Sensex plunged by 449.22 points or 2.34 per cent to 18733.04. Consumer durable stocks led the fall with a drop of 5.55 per cent followed by realty (4.45 per cent), banks (3.90 per cent), metal (3.24 per cent), power (3.21 per cent), oil & gas (2.65 per cent) and PSUs (2.57 per cent).

“Markets ended sharply lower on the back of continuing concerns about the rupee, and some disappointing results. The rupee traded at a new low and that caused concerns in the market,” said Dipen Shah, Head of PCG Research, Kotak Securities.

The rupee has been weakening even after the liquidity measures taken by the Reserve Bank of India (RBI) to contain the high current account deficit (CAD). Post the recent RBI policy meeting, markets have been expecting some measures from the government to arrest the fall of rupee. The government has also relaxed some of the foreign direct investment (FDI) rules. However, Mr. Shah said that “these have not had any impact, and further steps are needed to either curtail the CAD or finance it, and thereby stem the depreciation of the rupee.”

On the National Stock Exchange (NSE), the 50-share Nifty dipped by 143.15 points or 2.52 per cent to 5542.25.

“We witnessed sell-off on bourses once the Nifty moved below 5600-mark, which was a psychological support level and we have seen heavy sell-off in almost all counters,” said Alex Mathews, Research Head, Geojit BNP Paribas.

“Poor quarterly numbers also aided the fall,” said Mr. Mathews, adding, “Rupee touched a new low, and volatility index of the stocks also shot up which indicates uncertain market conditions.”

There was no major immediate support, he said. “At 5574, we can see minor support. The extreme short-term indicators are in the over-sold region, and give a minor hope for market participants,” Mr. Mathews added.

The rupee fell to a record low of 61.80 a dollar intra-day compared to its previous intra-day low of 61.21 on July 8. However, it recovered as the government announced that Raghuram Rajan, a pro-reforms advocate, would be the new Governor of the Reserve Bank of India (RBI). Since the beginning of May, the rupee has tumbled by more than 12 per cent against the dollar.

The rupee closed at 60.77 compared to its previous close of 60.88/89 a dollar.

“Rupee opened weak in the morning due to positive data in the U.S., and during the day, it further weakened due to dollar demand by corporates and oil companies,” said N. S. Venkatesh, Chief General Manager, IDBI Bank.

The rupee started strengthening at the fag-end of trading on the back of British pound sterling and euro strengthening against the dollar and also because of supply of dollar in the market, Mr. Venkatesh added.

“We expect pressure to continue on the rupee in the short-term,” said Varun Goel, Head PMS, Karvy Stock Broking. “While CAD has remained high, the weakening fiscal situation also revives the threat of a sovereign downgrade. The current account situation requires dramatic measures to be taken on the gold import side. Till such time this issue is suitably addressed, rupee might continue to fall,” he added.

The steep fall in rupee’s value over the last three months hampered the financial stability of the country, and led to a fall in investor sentiment, Karvy Stock Broking said in a report. The rupee’s depreciation caused a huge outflow of foreign capital from the debt and equity markets. The highest monthly outflows of foreign capital happened in July due to weak economic growth prospects and a sinking rupee.

If the rupee’s depreciation continues further, it could become a major challenge for the RBI to sustain economic growth and maintain macro-economic stability. This time, in its first quarter review of monetary policy, the RBI has focussed on the rupee. In the RBI’s policy review meeting, the central bank stated that “the priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth”.

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