The rupee was mainly hit by the demand for dollars by importers coupled with stock market losses. The stock markets saw a downfall after the growth data slowed to its weakest in nearly six years at the end of 2008. The rupee closed at 51.10/12 against the dollar on Friday, compared to 50.45/47 on Thursday.
Analysts believe the bearishness in rupee is all set to continue, at least in the short term. On Friday, we saw a lot of demand for the dollar from corporates and oil companies, said a dealer with a private sector bank.
Shares plunged 0.7%, as the growth data indicated that the Indian economy was also bearing the brunt of the global financial downturn.
The economy grew an annual 5.3% during the December quarter, its lowest pace in almost six years. There is a wide expectation in the market that the Reserve Bank of India (RBI) will soon announce another round of rate cuts.
A further cut in the rates would further weaken the rupee, said Moses Harding, executive VP & HD of wholesale banking group with IndusInd Bank.
Ajay Sahai, director general, Federation of Indian Export Organisations, the apex body for exporters, said that this is the right time for banks to start extending dollar-denominated credit to exporters to ensure that they are able to offer products at competitive prices in markets abroad.
He said it is wrong to assume that all exporters are making gains due to the weakening of the rupee value against the dollar.
Under normal circumstances, they would have realised their payments in three months, but due to the demand slowdown in major markets like the US and European Union, the realisation of proceeds is taking as long as 8 to 12 months. This is in turn affecting the supply side, as exporters are not able to plough back returns into production, he said.
Besides, import-intensive sectors like gems and jewellery and electronic hardware are also affected. The strengthening dollar increases the costs of their input materials. This in turn forces them to hike prices of their value-added products that are exported, thereby making such items less competitive, Sahai said.
There has also been a major FII outflow of about $1.7 billion worth shares during the year, after they dumped more than $13 billion in 2008.
We are looking at further weakening of the rupee, given more pullout by foreign investors, given the weak economic data, said Harding.
On Tuesday, Standard & Poor's (S&P) ratings services revised outlook on the long-term sovereign credit rating on India as negative from stable. The outlook revision reflects that Indias fiscal position has deteriorated to a level that is unsustainable in the medium term. We expect general government deficit, including off-budget measures such as oil and fertiliser bonds, to increase to 11.4% in the fiscal year ending March 31, 2009, from 5.7% in the previous fiscal year, said the report.
The economy grew an annual 5.3% during the December quarter, its lowest pace in almost six years
There is a wide expectation in the market that the RBI will soon announce another round of rate cuts
Analysts believe the bearishness in rupee is all set to continue, at least in the short term