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The rupee sank a whopping 110 paise to close at a lifetime low of 58.15 against the dollar on Monday, hurt by outflow of the American currency and weak macroeconomic indicators.
The near-2 per cent single-day depreciation of the rupee vis-à-vis the dollar can stoke inflation in the Indian economy, which imports almost 80 per cent of its crude oil requirement. A weakening rupee makes import of goods and services and overseas travel dearer. There are also major worries about the expanding current account deficit.
The Reserve Bank of India did not intervene in the currency market on Monday, according to traders.
The rupee’s slide did not stop even after Economic Affairs Secretary Arvind Mayaram said the panic in the foreign exchange market was unwarranted based as it was on a misinterpretation of the US Federal Reserve chief’s observations on quantitative easing.
Volatile movement
Opening at 57.25 (previous close: 57.07) to the dollar, the rupee lost 1.9 per cent during a day of extremely volatile trade. Intraday, the rupee moved between a high and low of 57.18 and 58.15, respectively.
A better-than-expected jobs data in the US renewed fears among currency market participants that the Federal Reserve will halt its monthly bond-buying programme some time later this year. This fear has lead to flight of dollars back to the US, which is considered a safe-haven by investors.
“The emerging market currencies are depreciating primarily due to increasing strength of the dollar supported by improving economic data for the US and remarks by Fed Chief Ben Bernanke of a gradual end to quantitative easing,” said Rupa Rege Nitsure, Chief Economist, Bank of Baroda.
Widening CAD
Latest data show that India's current account deficit (CAD) widened to a record 6.7 per cent of GDP in the October-December 2012 quarter. CAD arises when a country’s total imports of goods, services and transfers exceed exports.
The country relies heavily on foreign institutional investors to finance this deficit. This is risky because such foreign capital is prone to sudden stoppages and/or flight. “Absence of concrete measures by the Government to address the supply-side bottlenecks and high dependence on foreign institutional inflows to plug the current account gap are some of the reasons behind rupee’s recent fall,” said Moses Harding, Head ALCO and Economic & Market Research, IndusInd Bank.
satyanarayan.iyer@thehindu.co.in
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