The rupee on Wednesday crumbled to a new low of 60.71/$, sliding 1.72% by the close of trade. After a steady start, strong demand for dollars from oil companies started to push the rupee down towards 60/$. Once the rupee fell below those levels, stop losses of positions held by banks were triggered and this led to a near free-fall in the last two hours of trade, say forex traders. The RBI didnt intervene in a big way perhaps hamstrung by a limited stock of foreign exchange reserves. Reserves stood at $290 billion as on June 14. Dealers said the public sector banks were seen selling dollars around 59.98/$, possibly at the behest of RBI. However, the selling was not persistent or large enough to prevent a new all-time low on the currency.
Unlike in earlier instances, government officials also didn't try to calm the markets.
The gross financing needs for the month of June are nearly $14 billion, so its no surprise the rupee is under such a pressure, said Sajjid Chinoy, India economist at JPMorgan. India needs $7 billion a month to finance its current account deficit and another $2 billion to meet repayment of forex loans. However, this month also saw a net outflow of dollars of more than $5 billion from the debt markets, explains Chinoy.
Having broken most key technical and psychological levels, market players are worried the currency could even slip to as low as 62/$ in coming days. The rupee has lost a whopping 12% in just two months as foreign institutional investors pulled out $6.55 billion from the bond market. Sharp one way moves like this can scar investors and corporates, endanger capital flows and reflexively weaken fundamentals of the country, said Ananth Narayan G, head of global markets at Standard Chartered Bank.
Bankers and currency experts said the companies having unhedged exposures would be hit badly irrespective of whether they book, buy or sell orders for the dollar. It is estimated that 60% of the forex loans of companies is unhedged. I think companies especially the edible oil sector are going to be hit the most because their businesses are tight, margins are low and they have to survive on borrowings, said Jamal Mecklai, chief executive officer of Mecklai Financial Services.
Some corporates such as HPCL said the hit would be minimal as they practice sound hedging policies. We have a natural hedge against currency fluctuations since we are an oil refiner. Beyond this natural hedge, we do have the risk. But I dont foresee any big impact from this depreciation, said KV Rao, director finance at HPCL.
Rupees depreciation has made imports costly which in turn could make domestic goods dearer by driving up inflation. The RBI in the past has estimated that every 10% depreciation in the Rupee adds 100 basis points to inflation over time.
Pummeled by FIIs selling and worries that a depreciating rupee would push up inflation and hence crimp any room for rate cuts, bond yields too surged 10 basis points and the 10-year benchmark 7.16%, 2023 yield settled at 7.58%. FIIs have sold $5.4 billion in debt holdings in June. So far this year, there has been a net outflow of nearly $1 billion from the debt markets.
It is a breach of a significant psychological level. For a country with a slowly improving CAD, the 12% fall over last few days is not a good news
Ananth Narayan G,
head, global markets
Standard Chartered Bank
Everyone will be affected. Firms in the edible oil sector will be worst hit as their business is tight, margins are low and they have to survive on borrowings
Mecklai Financial Services CEO
Gross financing needs for June are $14 bn, so its no surprise rupee is under pressure. Depreciation on balance sheets and inflation worry me, given the pace at which it fell
The fair value is roughly around 56-57/$ for the rupee. This kind of overshoot beyond the fair value is not really sustainable for a fairly long time
HDFC Bank chief economist