The rupee fell sharply against the dollar to close at an all-time low of Rs 50.02 on Tuesday. The 35-paise fall from its previous closing was prompted by heavy dollar demand from FIIs exiting Indian stocks and oil companies.
There was another reason for the precipitious drop — an arbitrage opportunity between the domestic rate and the offshore rate for non-deliverable forwards.
Forward trades on the partially-convertible rupee — under which a buyer can, say, buy dollars for a delivery at a future date but at today's price— are also conducted in offshore markets, such as Singapore and Dubai. But, in these trades, the dollars are not delivered; only the difference in the prices is paid out. It is a mechanism used by investors for hedging their India exposure.
Lately, the rupee-dollar rate in these markets had climbed to Rs 50.80/95, providing a clear arbitrage opportunity. This sparked off a rush to buy dollars in the domestic market for selling them in the offshore markets.
The rupee had earlier breached the psychologically crucial level of Rs 50 per dollar on October 27, but later recovered during the day to close at 49.95 per dollar. Since January 1, the Indian currency has depreciated by 27% from Rs 39.42 per dollar.
The rupee started depreciating since May this year, when the FIIs accelerated their sell-off of Indian equities. According to RBI data, in the past six-and-a-half months, rupee has depreciated by 25% from Rs 40 per dollar to below Rs 50 per dollar. The depreciation gained momentum since September, 2008, after the financial blow-out in US and Europe. In the past two months, the Indian currency has lost 11% value - from Rs 45 to below Rs 50 per dollar.
The RBI has been intervening in the foreign exchange market by selling dollars, but that has not been helped much in arresting the fall in the rupee's value. One indication of the RBI's extent of intervention can be gauged from the fall in foreign exchange reserves - from a peak level of $302 billion as on June 27 to $242 billion as on November 27 but a part of this drop could also be due to revaluation of the currencies in which the reserves are held.
A senior treasury official at a PSU bank said that the RBI's intervention has helped rupee to stabilize at the current level. But, as the sentiment is bad, RBI's intervention with its limited amount of foreign currency reserve will have a limited impact.
The main reason behind the rupee's depreciation is the demand of dollar from foreign institutional investors, who have sold Indian stocks worth over $13 billion since January 2008. In October alone, they sold $ 3.84 billion.
In addition, export earnings have been badly hit as the financial turmoil has started impacting sentiment in the real economy. The trade deficit widened to over $10 billion in September. On top of this, the banker said, exporters are not bringing their dollar earnings to the country.
They are parking their foreign currency earnings abroad in the hope of bringing it in later when the rupee depreciates further. This would then allow them to earn more rupees then. At the same time, as dollar is appreciating, importers are advancing their purchase of foreign currency to meet their import requirements.
Foreign exchange dealers also said there is strong dollar demand from oil refiners for making payments against crude imports.
The domestic currency moved in a wide range between Rs 49.54 per dollar and Rs 50.04 per dollar during the day. But as the 30-share sensitive index of Bombay Stock Exchange fell by 163 points or 1.83%, extending the losses to sixth day in a row, rupee also closed at the lower level. In six days, the BSE sensex has lost over 1,700 points. The RBI fixed the rupee reference rate at Rs 49.74 per dollar and at Rs 62.78 against the euro.
The rupee premiums on forward dollar - which indicate the premium buyers are willing to pay for buying dollars - however ended lower on the expectation of fresh dollar receipts by exporters. The six-month forward dollar premium payable in April ended at 58-61 paise, down from 61-64 paise on Tuesday and one year forward, maturing in October, finished lower at 85-88 paise from 90-93 paise previously.
In cross-currency trades, the rupee remained weak and moved down further against the pound sterling and the euro while edged up against the Japanese Yen. The rupee fell further against the pound to end the day at Rs 75.24 per pound from last close of Rs 74.60/62 per pound and also dropped against the single European unit to Rs 63.14/16 per euro from overnight close of Rs 62.65/67 per euro.
It, however, inched up against the Japanese Yen to Rs 51.65/67 per 100 yen from its previous close of Rs 51.67/69 per 100 Yen.
Soruce: http://timesofindia.indiatimes.com/Rupee_falls_to_record_low_of_50_per_dollar/articleshow/3731383.cms
There was another reason for the precipitious drop — an arbitrage opportunity between the domestic rate and the offshore rate for non-deliverable forwards.
Forward trades on the partially-convertible rupee — under which a buyer can, say, buy dollars for a delivery at a future date but at today's price— are also conducted in offshore markets, such as Singapore and Dubai. But, in these trades, the dollars are not delivered; only the difference in the prices is paid out. It is a mechanism used by investors for hedging their India exposure.
Lately, the rupee-dollar rate in these markets had climbed to Rs 50.80/95, providing a clear arbitrage opportunity. This sparked off a rush to buy dollars in the domestic market for selling them in the offshore markets.
The rupee had earlier breached the psychologically crucial level of Rs 50 per dollar on October 27, but later recovered during the day to close at 49.95 per dollar. Since January 1, the Indian currency has depreciated by 27% from Rs 39.42 per dollar.
The rupee started depreciating since May this year, when the FIIs accelerated their sell-off of Indian equities. According to RBI data, in the past six-and-a-half months, rupee has depreciated by 25% from Rs 40 per dollar to below Rs 50 per dollar. The depreciation gained momentum since September, 2008, after the financial blow-out in US and Europe. In the past two months, the Indian currency has lost 11% value - from Rs 45 to below Rs 50 per dollar.
The RBI has been intervening in the foreign exchange market by selling dollars, but that has not been helped much in arresting the fall in the rupee's value. One indication of the RBI's extent of intervention can be gauged from the fall in foreign exchange reserves - from a peak level of $302 billion as on June 27 to $242 billion as on November 27 but a part of this drop could also be due to revaluation of the currencies in which the reserves are held.
A senior treasury official at a PSU bank said that the RBI's intervention has helped rupee to stabilize at the current level. But, as the sentiment is bad, RBI's intervention with its limited amount of foreign currency reserve will have a limited impact.
The main reason behind the rupee's depreciation is the demand of dollar from foreign institutional investors, who have sold Indian stocks worth over $13 billion since January 2008. In October alone, they sold $ 3.84 billion.
In addition, export earnings have been badly hit as the financial turmoil has started impacting sentiment in the real economy. The trade deficit widened to over $10 billion in September. On top of this, the banker said, exporters are not bringing their dollar earnings to the country.
They are parking their foreign currency earnings abroad in the hope of bringing it in later when the rupee depreciates further. This would then allow them to earn more rupees then. At the same time, as dollar is appreciating, importers are advancing their purchase of foreign currency to meet their import requirements.
Foreign exchange dealers also said there is strong dollar demand from oil refiners for making payments against crude imports.
The domestic currency moved in a wide range between Rs 49.54 per dollar and Rs 50.04 per dollar during the day. But as the 30-share sensitive index of Bombay Stock Exchange fell by 163 points or 1.83%, extending the losses to sixth day in a row, rupee also closed at the lower level. In six days, the BSE sensex has lost over 1,700 points. The RBI fixed the rupee reference rate at Rs 49.74 per dollar and at Rs 62.78 against the euro.
The rupee premiums on forward dollar - which indicate the premium buyers are willing to pay for buying dollars - however ended lower on the expectation of fresh dollar receipts by exporters. The six-month forward dollar premium payable in April ended at 58-61 paise, down from 61-64 paise on Tuesday and one year forward, maturing in October, finished lower at 85-88 paise from 90-93 paise previously.
In cross-currency trades, the rupee remained weak and moved down further against the pound sterling and the euro while edged up against the Japanese Yen. The rupee fell further against the pound to end the day at Rs 75.24 per pound from last close of Rs 74.60/62 per pound and also dropped against the single European unit to Rs 63.14/16 per euro from overnight close of Rs 62.65/67 per euro.
It, however, inched up against the Japanese Yen to Rs 51.65/67 per 100 yen from its previous close of Rs 51.67/69 per 100 Yen.
Soruce: http://timesofindia.indiatimes.com/Rupee_falls_to_record_low_of_50_per_dollar/articleshow/3731383.cms
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