The Hindu Business Line : Market trends point to further downside in rupee

Bangalore, Oct. 24 The rupee has shed about 25 per cent since the beginning of this financial year on the back of massive exodus by foreign institutional investors (FII).

The rupee perched on the edge of 50 to a dollar and appeared headed further south from the trend in the non-deliverable forward markets (NDF). NDF is forwards market for emerging market currencies where settlements are made in US dollars.

NDFs are quoted for up to a year, though popular contracts are mostly for one month. Currently, NDFs for one month are quoted at Rs 51.80 per dollar, implying that more short-term depreciation is likely in the coming weeks.

Sentiments were entirely driven by FII exits. FII sell-out since the beginning of this year was $8.5 billion. The sell- out, traders said, was largely for repatriation to shore up the capital of their respective parents hit by the financial meltdown.

The rupee also shed about 34 per cent against the Japanese yen since the beginning of this year. The yen is currently Rs 52.56 for 100 yen. Traders said that the rupee’s depreciation against the yen though was mostly related to reversals in the Japanese currency carry trade.

Carry trade refers to borrowing in yen taking advantage of cross currency movements. Japanese investors had used this mechanism for investing in emerging market equities. Traders said that Japanese investors had also begun reversing investments in the country and pulling out, leading to redemptions since June this year.

Stable vs euro, pound

Against the euro and British pound sterling, the rupee remained relatively stable since the beginning of this year. The depreciation was only 2.25 per cent and 0.47 per cent respectively. But traders said that the relative stability against both these currencies was more due to cross currency movements. Both the euro and the pound sterling have weakened against the dollar with the financial meltdown.

The Bank of England and the European Central Bank are still faced with serious capitalisation issues for their respective financial institutions hit by the financial meltdown. Besides, there are also expectations of more write-downs in the US leading to exits from the euro to the dollar.

Forward cover

Bankers said that many of the exporters had taken forward cover at much lower exchange rates, especially some of the information technology companies, resulting in some notional losses. Some of them had hedged when exchange rates were around Rs 46 per dollar. But many commodity, diamond and manufactured goods exporters had preferred to unwind their hedges in the hope of booking profits. In fact, traders said, commodity exporters had preferred to leave their position open.

Surprisingly, barring oil companies, some importers also left their positions open. Traders said that this trend was in anticipation of a reversal in the movement of exchange rates once foreign currency non-resident deposit accretions start after the revision in spreads. Last week, the RBI had increased the spreads on FCNR deposits to 100 basis points over LIBOR.

Besides, liberalisation in the external commercial borrowings (ECB) was also expected to bring in long-term debt inflows. The revised ECB guidelines had pushed up spread ceiling to 500 basis points over LIBOR.