The rupee dived 163 paise to 67.65 against the dollar on Tuesday due to heavy capital outflows and fears of a downgrade by rating agencies.

The domestic unit tested an intra-day low of 68.27, down 225 paise from Monday’s close of 66.02 against the dollar. RBI’s intervention helped limit the fall.

S&P, Fitch and Moody’s have aired their concerns in recent weeks, as the slowdown in growth threatens to derail fiscal austerity plans. On Monday, S&P put India’s chances at a downgrade higher than Indonesia. This has elicited concerns among market investors.

The Indian currency opened 28 paise weaker to 66.30 per dollar due to appreciation of the American dollar overseas amid renewed dollar demand. It gained to 66.25 in the early trades and continued to freefall before some public sector banks sold dollars as the Reserve Bank intervened at 68 levels.

Meanwhile, the BSE-benchmark Sensex plunged by 651.5 points (3.45 per cent) to close at 18,235 points.

According to forex dealers, besides a rating downgrade, threat of the Syrian war put pressure on the rupee. “There were no inflows and the concerns over sovereign rating downgrade amid Russia’s defence minister’s statement triggered heavy sell-off in the forex market,” said a dealer with a public sector bank.

The Reserve Bank of India’s special dollar window for oil retailers last week helped ease the offshore non-deliverable forward (NDF) contracts thereby limiting losses due to speculation in the currency market.

However, this did not help as lower GDP and manufacturing sector growth data subdued investor sentiments yet again.

The rupee had touched a historic low of 68.80 against the US dollar on August 28.

Radhika Rao, Economist, DBS said, “Signs of trouble have sprouted of late. Since late May 13, the currency has depreciated sharply, pulling down the equity and bond markets in unison. The liquidity measures to support the currency instead intensified growth risks and narrowed scope for the monetary policy to assume a growth supportive stance. In the meantime, the stark rupee decline is feeding into inflation and raising the imported fuel costs.”

She added, “Risks of a move to sub-investment rating are likely to resurface late-2013- early 2014 as pre-election spending is ramped up further and political worries heighten.”

Call rates, Govt Bonds end weaker

The inter-bank call money rate, the rate at which banks borrow money from each other to meet their short-term fund requirements, ended weaker at 10.10 per cent from its previous close of 10.25 per cent.

The 7.16 per cent government bond, which matures in 2023, ended weaker at Rs 90.75 from Monday’s close of Rs 91.47. Yields jumped to to 8.58 per cent from 8.47 per cent.

The bond prices had increased to Rs 92.69 during the day with yields softening to 8.26 per cent. However, a weaker currency and heavy capital outflows put pressure on the bonds.

(This article was published on September 3, 2013)
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