Breaching the 60-mark against the dollar for the second time, the rupee dropped by 106 paise to yet another life-time low of 60.73 on Wednesday.

Month-end dollar demand from banks and importers amid persistent capital outflows weighed down the unit.

“Essentially, after breaching the 60 level, the currency market saw more short-covering by banks due to the weak equity market. This is a temporary phase and the rupee will pull back and trade around 58-59 levels by next week,” said N.S. Venkatesh, Head-Treasury, IDBI Bank.

A weaker rupee could lead to worsening of inflation and the fiscal deficit amid slowing capital flows into the equity market. The domestic unit opened marginally weaker at 59.72, against the previous close of 59.67 on Tuesday.

The BSE-benchmark Sensex ended weaker by 77 points (0.41 per cent) at 18,552 points.

With the buy-back offer of Hindustan Unilever (HUL) due to close on July 4, more capital inflows are expected into the equity market, Venkatesh added. Foreign investors have been persistently paring their investments in the equity and debt markets, after the US central bank announced last week that it would ease its monthly bond-buying programme by March 2014.

This triggered heavy capital outflows from emerging markets, strengthening the dollar. The dollar index strengthened to its 3-week high against the euro on Tuesday. According to dealers, the RBI did not intervene in the market as it is no longer a strong enough measure to limit rupee depreciation. Usually, during a rupee downslide, the central bank asks banks to sell dollars to arrest the rupee fall.

“As the rupee has breached the 60-mark, it is likely to depreciate further in continuation of its strong bearish momentum, though a short bounce-back cannot be ruled out.,” said Sugandha Sachdeva, AVP, Currency Research, Religare Securities.

(This article was published on June 26, 2013)
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