The depreciation is mainly due to structural factors faced by the Indian economy
The rupee, on Monday, plunged below the psychological 55-level to close at an all-time low of 55.03 against the dollar amid robust demand for the U.S. currency from banks and importers, but there was no visible Reserve Bank of India (RBI) action to shore up the domestic unit from its record low levels.
At the inter-bank foreign exchange market, the rupee opened slightly lower at 54.45 a dollar from last weekend's close of 54.42 and immediately touched a high of 54.44. However, it soon started falling and at the fag-end trading breached the crucial 55-level and closed at 55.03, a fall of 61 paise or 1.12 per cent from its previous close.
Forex dealers said though rupee plunged to record low levels for the third day in a row, the RBI was conspicuous by its absence in the forex market.
Dealers, however, said RBI was expected to intervene with policy measures when markets resume on Tuesday.
“Rupee breaching 55 is a bit of worry as this has been seen as a strong resistance level. However, we expect the government to come up with some measures, which will help the domestic currency to pull back from the current levels,” said N. S. Venkatesh, Head of Treasury, IDBI Bank. He also said rupee was likely to appreciate tomorrow [Tuesday] as additional liquidity from the exporters' Exchange Earner's Foreign Currency (EEFC) accounts would be added to the system.
T. S. Srinivasan, GM (Treasury) of Indian Overseas Bank, said there was a short-term weakness. “Going ahead, the central bank is likely to intervene without which the weakness in the currency is likely to continue,” he said.
The depreciating rupee cast its shadow over the benchmark index, Sensex, which pared its early gains to end with a modest gain of 30.51 points.
On Sunday, Finance Minister Pranab Mukherjee had said that the steep fall in the rupee was a matter of great concern and the Centre was trying to resolve the situation.
“It is a matter of great concern. We are watching the situation. The Centre is not (sitting) idle. We are trying to resolve (the issue),” Mr. Mukherjee had told reporters in Kolkata.
With rupee breaching its previous low, the 55.30-55.50 levels became the near-term targets, said Pramit Brahmbhatt, CEO, Alpari Financial Services (India).
Impact on imports
The declining value of rupee, which has depreciated by over 11 per cent against the dollar since March, directly pushes up the cost of crude oil and other imported commodities.
“The RBI is currently in a state where it can neither support the rupee nor can allow the rupee to depreciate further,” said Abhishek Goenka, CEO, India Forex Advisors said.
In the past few weeks, the RBI took some measures, including directing exporters to convert 50 per cent of the balance in EEFC accounts into rupees.
Hemal Doshi, Chief Currency Strategist, Geojit Comtrade, said the recent rupee depreciation was mainly due to structural factors faced by the Indian economy such as twin deficits, and high inflation. “Also, developments in Europe are also weighing on the domestic currency,” Doshi said.
On the other hand, Sudhir Kumar Jain, GM (Financial Management, IRC, Treasury and ID), Dena Bank, said that unless government came up with some measures to address structural issues faced by the economy along with steps to ramp up capital flows, the domestic currency would witness weakness in the near-term.
The RBI fixed the reference rate for the U.S. dollar at 54.6810 and for the euro at 69.8556. — PTI