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.