A marked increase in demand for dollars has been pushing the rupee lower in recent sessions as banks exercise increased caution over issuing buyer’s credit, letter of credit (LC) and similar instruments for trade finance in the wake of the fraud uncovered at Punjab National Bank (PNB).
The rupee, which closed at 64.89 to a dollar on Tuesday, slid to as low as 65.31 intraday before state-run banks stepped in and sold some dollars helping the Indian currency pare its losses. The rupee closed at 65.17 to a dollar, down ₹0.28 when compared to the previous close.
Curbing volatility
The Reserve Bank of India maintains that it never targets a particular value for the rupee and only intervenes to curb volatility.
“The primary factor is the stress we see in the trade finance market with rollover of buyer’s credit, LC etc,” said Anindya Banerjee, currency strategist with Kotak Securities.
“So that is why you are seeing a jump in the spot demand for dollars. So, what is happening is lot of dollar supply is preponed… it is brought forward to meet the demand for dollars in the spot market,” Mr. Banerjee said.
Since the PNB scam broke on February 14, the rupee has depreciated 1.3% against the dollar. It has weakened about 2% this year making it the worst performing currency in Asia in 2018 after the Philippine peso, which has depreciated about 4.2%.
The country’s second-largest lender, which had initially reported that it may suffered about ₹11,500 crore worth of fraudulent transactions in one of its branches in Mumbai, recently said that figure could increase by another ₹1,300 crore. The fraud related to the unauthorised issuance of letters of understanding (LoUs) for securing buyer’s credit.
Other factors that could impact the rupee’s fortunes adversely include the recent trend of the dollar strengthening internationally. There has been an increase in dollar demand in the wake of the U.S. administration’s recent measures to incentivise the nation’s companies to repatriate earnings from overseas. This is also causing a dollar shortage in the offshore markets.
Also, any continuation of a sell-off in domestic equity markets would hurt the Indian currency, dealers said. Till Tuesday, foreign institutional investors had pulled out almost $900 million from equity markets since the scam came to light on February 14. On Wednesday, the BSE Sensex fell 162.35 points, or 0.47% , to close at 34,184.04.
