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Rupee: Grace and rage go hand in hand

Last Updated 26 December 2012, 17:05 IST

Mumbai, dhns: In 2011, around this time, leading rating agency CRISIL came out with a report stating that it expects the domestic currency rupee to strengthen to Rs 45-46 level against dollar in the next five months on the back of pickup in FII inflows towards early 2012.

To be precise, CRISIL added that the rupee is expected to strengthen to Rs 45-46 per dollar by March 2012, from the then current lows of around Rs 50 per dollar.

No matter how best they were equipped, things didn't turn out the way the rating agency had predicted. CRISIL's forecast on rupee was quite far off, if not very wide off, as the Indian currency fell in its very first session of 2012 on January 2 and closed at Rs 53.30/31 against dollar on demand from oil importers, although losses were limited by a turnaround in domestic stocks and dollar-selling by foreign banks. 

Even as the first two months of calendar 2012 showed some strengthening by rupee, thereafter in March it began to slide on the back of widening current account deficit amid a recent rise in global oil prices and a fall in the euro, besides weaker domestic shares. By the end of March, as exporters cashed in dollars on the last trading session of the fiscal year, the currency was on track to post its biggest monthly fall in four months and the outlook also remained subdued.

Rupee on April 3 - being the first trading day of the new fiscal -- closed stronger, helped by an improvement in global risk appetite that pushed domestic stocks higher, while demand for dollars from oil importers pulled it back from a 2-week high, it could not sustain the same during the month for the next two weeks and as the month drew to a close, the local currency fell having hit by heavy demand for dollars from oil importers and tracking a euro that was under pressure.

Free fall

The month after April witnessed a free fall of rupee which plunged to its all-time low of 55.47 against the dollar on May 23 before closing at 55.39 as it depreciated by 36 paise compared to its overnight close of 55.03. This was the fifth consecutive all-time low in the five sessions. The slide came even after the Reserve Bank of India's (RBI) announcement of introducing measures to target arbitrage and speculation in futures and options markets. The central bank had also intervened aggressively that month, while maintaining a low profile.

When forex traders thought they saw an all-time record low for the rupee, they were surprised the very next day (May 30) when it depreciated by 21 paise to 56.21 against the US dollar at the Interbank Foreign Exchange market in early trade, following strong demand for the dollar from importers amid concerns over a deepening eurozone crisis. Analysts then predicted that rupee might breach 57-level soon.

They were not wrong, as the rupee continued its free fall in June tracking the dollar movement against other global currencies, "even as domestic issues like the fall in GDP and political issues were also a concern," points out IndusInd Bank executive Vice-President Moses Harding.

And on June 22, rupee hit a record low against the dollar for a second consecutive session posting its worst weekly fall in nine-months, hurt by dollar demand from oil firms and gold importers as well as over the broad-risk off sentiment. Rupee ended at 57.13 per dollar after hitting a record low of Rs 57.32 per dollar.

Given the lack of a clear plan for improving investment environment and bleak fiscal outlook, a research note issued by HSBC in the last week of June had maintained that the weakness in rupee is likely to persist for sometime and "the local currency is expected to end the year at around 57/dollar as the conditions necessary for lifting up the rupee are not in place.

" It also observed that "For INR to strengthen more meaningfully and sustainably against the USD, the government needs to undergo the necessary structural reforms."
Marginal recoverySubsequent months like July to September, rupee appreciated relatively but not the way CRISIL had predicted. In July, for instance, it recovered marginally after breaching the 55-level against the dollar, but was still down 41 paise on good demand for dollars from banks and importers.

Ditto in August, since the rupee failed to maintain initial gains by 10 paise to 55.38 on August 13.Nevertheless, the appreciation (albeit relatively) of rupee against the key foreign currencies did boost second quarter results for India Inc with lower cash out flow for repayment of loans due in the quarter or servicing interest.

It was evident in infrastructure companies as they have large foreign borrowing. Financial research firm Capitaline’s data reveal that 167 Indian companies reported Rs 13,067 crore of loss on foreign exchange transactions in the first quarter ending June. This included MTM (mark-to-market) losses on debt besides foreign exchange losses from other transactions such as higher out flow for bank loans.   

October saw the rupee erasing its early gains in the first week but hovering around 51 plus levels on persistent selling of the dollar by banks and exporters. This was amid strong capital inflows after the government unleashed the second phase of reforms, following which the rupee strengthened, and since then, has been rising in increments.

November riseAll the same, November especially in the fourth and last week of the month, rupee witnessed the rise most in two months especially after the government agreed to a vote in parliament on allowing foreign investment in multi-brand retail, raising hopes that it would muster a majority and push through key reforms. The month ended with rupee raising by a whopping 58 paise to hit over three-week high of 54.26 against the dollar on the back of a sharp rally in the domestic equities.

 In fact, the currency gained 147 paise, or 2.64 percent from the last three sessions in that month.In December, after slipping below the 55-mark after three weeks, the rupee is set to close more or less at the same level. On Friday last, the rupee dipped by 21 paise to slip below the 55-mark after three weeks to close at 55.06 against the dollar due to sustained dollar demand from importers to meet their month-end requirements, amid renewed concerns over the US budget.

Even as a firm dollar overseas weighed on rupee sentiment, forex traders aver that sustained capital inflows have restricted the rupee's fall.

The rupee moved in a range of 54.99 and 55.30 against the dollar at the Interbank Foreign Exchange (Forex) market before settling at 55.06, a loss of 21 paise, or 0.38 per cent from its previous close.

In this context, India Forex Advisors' (IFA) Founder & CEO Abhishek Goenka says, "The weakness in rupee was mainly on account of recovery in the dollar index, euro falling below $1.3200 levels and uncertainties over US fiscal cliff.

All the Asian currencies were trading on a negative note against the US dollar." He feels that "there is risk aversion taking place in the market, as can be seen from weakness in riskier assets globally”.

As for the outlook for 2013, IFA hints that rupee may hit 60-level, having already breached an all-time low of 57 levels to the dollar in 2012, the prediction looks more credible.

A study by a IFA research team takes into account various indicators like slowing GDP, widening current account deficit, fiscal deficit, IIP, WPI and balance of payments. A correlation between the above indicators and the rupee shows that poor performance on these fronts is largely causative of rupee weakness.

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(Published 26 December 2012, 17:05 IST)

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