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Wed 23 Nov 2011 10:36 AM

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Rupee rebounds to curb worst slide in three years

Indian currency has lost more than 14% this year, the worst among Asian currencies

Rupee rebounds to curb worst slide in three years
The rupee is is headed for the biggest decline since 2008

India’s rupee rose, erasing earlier losses, on speculation the central bank sold dollars to curb the worst slide in the currency in three years.

The rupee strengthened for the first time in eight days, rebounding from a record low, as some state-run banks sold dollars, according to J Moses Harding, an executive vice president at IndusInd Bank Ltd. The currency dropped earlier on concern Europe’s debt crisis will hurt demand for emerging- market assets.

“The rupee opened lower this morning, and then we saw state-run banks selling dollars, seemingly at the behest of the Reserve Bank,” Mumbai-based Harding said. “The aim, I think, would be to prevent the rupee from breaking the low we saw on Tuesday.”

The rupee advanced 0.4 percent to 52.1175 per dollar as of 11:28 a.m. in Mumbai, after earlier sliding as much as 0.5 percent, according to data compiled by Bloomberg. It touched an all-time low of 52.73 on Tuesday.

The Reserve Bank of India “can and will intervene” in the foreign-exchange market when it is consistent with its policy of ensuring that exchange-rate volatility does not impair macroeconomic stability, Governor Duvvuri Subbarao told reporters in the southern city of Hyderabad on Tuesday.

The rupee lost more than 14 percent this year, the worst performance among Asian currencies, and is headed for the biggest decline since 2008. Implied volatility on one-month dollar-rupee options, a gauge of expected fluctuations, jumped 184 basis points this quarter to 13.34 percent, based on data compiled by Bloomberg.

“The RBI has been intervening to some extent but nothing huge,” Patrick Perret-Green, Singapore-based head of foreign- exchange and rates at Citigroup Inc., said in an interview on Bloomberg TV on Wednesday. “But given the speed and scale of the move they will come in.”

Subbarao on Wednesday said he can’t confirm if the central bank intervened. The rupee’s fall is due to global uncertainty, and any central bank action may not help, Finance Minister Mukherjee told reporters in New Delhi on Tuesday.

The rupee is being punished for India’s current-account shortfall, which is receiving heightened attention due to the concern about the US deficit and European debt, said Nick Verdi, a currency analyst at Barclays Capital.

The current account, the broadest measure of trade, recorded a deficit of $14bn in the three months through June, compared with a shortfall of $5.4bn the previous quarter, according to central bank data. Offshore investors pulled $1.8bn from local equities since foreign holdings reached a record $104.4bn in July, according to data from the market regulator.

“India’s current-account deficit and a relative lack of capital inflows has really raised the currency’s sensitivity to sudden changes in risk sentiment,” Singapore-based Verdi said in an interview on Tuesday. “Risk sentiment globally has worsened given political developments in Europe and the US, so the rupee will stay an underperformer in Asia for the foreseeable future.”

The central bank in October said the deficit could widen, from 2.6 percent of gross domestic product in the year to March 2011, if oil prices continue to push up the import bill. India imports 80 percent of its fuel requirements and the cost of crude oil in New York jumped 22 percent this quarter to $96.73 a barrel.

The higher rupee-cost of oil will also boost inflation, which has stayed above 9 percent for 11 straight months, according to Sailesh K Jha, head of Asia market strategy in Singapore at Skandinaviska Enskilda Banken AB. He predicts wholesale prices will rise 10.2 percent in November, after climbing 9.73 percent last month.

“In our view the long-term negative impact of inflation, the lagged impact of higher interest rates and policy stalemate are likely to result in below trend growth,” Deepali Bhargava, chief economist at Espirito Santo Securities in Mumbai, wrote in a report published on Wednesday.

She predicts India’s economy will expand 7.2 percent in the year to March 2012, lower than the central bank’s forecast of 7.6 percent, and 7 percent the next year.

Three-month offshore forwards traded at 53.22 to the dollar, compared with 53.46 on Tuesday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

The rupee is expected to reverse its losses once the European crisis is resolved, RBI Governor Subbarao said on Tuesday. “Clearly, to what extent it moves and in which direction will depend on credible resolution of external situation, particularly the sovereign-debt problem in Europe.”

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