Saturday 23 June 2012

Rupee experienced a lifetime low of 57.16



           Yesterday the rupee experienced the biggest ever drop in nine months when it closed at an all-time low of 57.16 against the dollar, which is eventually 1.5% lower than its previous close of 56.57. In intra-day, rupee fell to a whooping low of 57.33 following a rush for dollars from various importers after rating agency Moody's downgraded major international banks. 


            Despite the steep fall there was not so much of panic in the markets as the rupee depreciation was partly offset by good news of oil prices continuing to be low. Oil constitutes almost a 3rd of India's import bill and demand from oil companies could subside once the RBI implements a govt. proposal which involves RBI selling dollars directly to the largest bank of India, the State Bank of India which would in turn sell them to various oil firms. Although this would deplete RBI's Forex reserves, it would bring stability into the forex market and may even reverse the sentiment vis-a-vis the rupee.

           “I feel that there has been a bit of overshoot in sentiment which can happen to any market”, said a bank expert. He also added that if there was any improvement in capital flows it could act as a catalyst for the recent trend to reverse. He pointed out that sentiment was causing rupee to weaken although several factors have gone in favor of the rupee in the last two months or so, like the gold imports have collapsed, crude oil prices have cut down and NRI deposits have grown after RBI eased the ceiling on foreign currency deposits. “There is a self correcting element in the market because of the overshoot. An improvement in capital flows, for any reason, could act as a catalyst for the trend to reverse, he added precisely.

            Data released by RBI showed that foreign exchange reserves rose by a huge $2 billion to $289.39 billion in the week to June 15 only. The increase in reserves was on account of appreciation of assets in non-dollar currency such as euro and UK pound, dealers said.