The rupee recorded its biggest single-day drop in 18 years on Wednesday, closing at a new historic low of 68.80 to the dollar, down 256 paise from Tuesday’s close.

“The momentum and sentiments have now moved to another level. The prospect of the US tapering its fiscal stimulus, the instability in Syria amid outflows from emerging economies, which have high current account deficit, have weighed heavily on the rupee,” said Ashish Parthasarthy, Head of Treasury, HDFC Bank.

In addition, the Lok Sabha approving the Rs 1.35-lakh crore Food Security Bill on Tuesday sparked fears of the fiscal deficit worsening. The domestic unit opened at 67.06, down 82 paise from Tuesday’s close of 66.24/$.

The unit continued its free fall from the opening level before recovering on intervention by the Reserve Bank of India.

“Public sector banks sold dollars at various levels on behalf of the RBI to limit the fall,” said a forex dealer with a public sector bank. However, heavy month-end demand for the dollar from banks and importers put pressure on the rupee.

After declining over 500 points in early trades, the BSE benchmark Sensex ended the session up 28.07 points (0.16 per cent) at 17,996.15. The dramatic recovery was explained as the effect of value buying by investors after the rupee was resuscitated by RBI intervention. The earlier fears of military action by the US in Syria were also muted, leading to a rebound in stocks.

The currency has fallen seven per cent this week and 15 per cent since July 15, when the RBI announced liquidity tightening measures to stem the volatility in the rupee.

“At this point in time, the effectiveness of the measures is limited. We need to weather this storm and wait for the sentiments to die down… when the market will say ‘enough’. Also, the narrowing current account deficit will bring some stability by mid-September,” Parthasarthy added.

beena.parmar@thehindu.co.in

(This article was published on August 28, 2013)
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