As if a slowing economy, soaring inflation and policy paralysis were not enough, equity and currency markets went into a tailspin on Monday with the rupee piercing the 52 mark against the dollar to close at its all-time low while the Sensex crashed below the 16,000-mark. The rupee, which closed at 52.145, has now given up nearly17% since January, shedding 7% in November alone. The previous low of 51.97 was hit on March 3, 2009, after the Lehman Brothers bankruptcy and the financial meltdown that followed.
With foreign institutional investors (FIIs) continuing to take risk off the table and few buyers left in stock markets, the Sensex on Monday lost 425.41 points to close at 15946.10 while the Nifty gave up 127.45 points to close at 4778.35. FIIs sold stocks worth more than $300 million in the last two sessions, adding to the pressure on the rupee.
Forex dealers said exporters continued to hold back dollar sales encouraged by the Reserve Bank of India?s (RBI) non-interventionist stance leaving corporates that needed to make immediate payments with little choice but to make purchases at 51-52 levels.
The RBI, dealers said, did intervene on Monday as it had on Friday though it reportedly sold only around $300-350 million. ?Surprisingly, nationalised banks were buying dollars aggressively,? said a dealer, adding that it may have been related to imports or loan repayments.
While market watchers feel the RBI should have talked up the rupee, there is a view that the currency is overvalued by about 4% on a real effective exchange rate basis. ?This is a temporary aberration and we believe the market will settle down and the rupee will return to 50-levels by the end of the year,? said Samiran Chakraborty, head of research at Standard Chartered Bank.
A weakening rupee has added to FIIs? woes since the Sensex has lost 33.6% in dollar terms this year and is now Asia?s worst performer. Uncomfortable with the slow pace of reforms and a slowing economy, most foreign funds remain underweight on India at a time of global risk aversion. India nevertheless trades at a premium to many of its emerging market peers.
Corporate earnings for the the months to September have been disappointing with profits for the Nifty 50 set of companies falling for the first quarter in two years. Sensex profits will grow at just 14.4% in 2011-12, compared with a 19% increase anticipated before the results season. Says Nilesh Shah, president, Axis Direct: ?One could say valuations are in our favour now because India?s premium to peers has narrowed.? Shah believes that if the government gets its act together, the Indian market will not be de-rated further.
The rupee’s crash has hurt corporate profits as companies have been forced to mark-to-market the losses. The rupee has been among the worst-performing currencies this year. Last week, RBI deputy governor Subir Gokarn defended the central bank?s non-interventionist stance, saying it may not be wise to use reserves to defend the currency since they were not the outcome of persistent current account surpluses, unlike in many countries, particularly in the region. ?So, the use of reserves to defend an exchange rate, which may not be defensible beyond a point, means we end up with the same pressures and with a lower set of defences against it,? Gokarn observedhad in an interview to a TV channel.
A recent CLSA reported noted that the potential for rupee weakness is clearly driven by India?s perennial current account deficit.
?With renewed external risk aversion likely sooner or later, at a time when there is a question mark on Indian growth for domestic reasons, there is clearly every reason for renewed currency weakness,? the report says.