As importers rushed in to buy dollars as oil prices hit $120 a barrel, the rupee dropped to 41 levels against the dollar. On Tuesday, the partially-convertible Indian currency ended at 40.95/96 against dollar, 0.8% lower from Monday?s close of 40.61/62.
This fall in rupee has been the lowest since late August 2007. ?The main factors can be attributed to heavy demand from oil companies and lack of capital inflows,? said Agam Gupta, head of forex trading at Standard Chartered Bank, adding that high oil caused some panic within the oil companies in the market, which forced other importers to go in for heavy buying of dollars.
This was supported by strengthening of the dollar due stronger-than-expected growth in the US service and FII equity sales, reckons Alex Mathew, head of research centre at Geojit Financial Services.
Rohan Lasrado, head of trading at HDFC Bank, said that heavy dollar buying in the non-deliverable offshore forwards market (NDF) also led to rupee weakening.
?The NDF market looks very active. There is a lot of buying and demand coming by leading to a depreciating rupee against dollar,? Lasrado said.
Lasrado expects the rupee weakening to continue as there is lack of supplies and importer demand will continue. ?The rupee could touch 41.20 against dollar next week, 41.50 levels may happen in the next one month, if there aren?t enough supplies,? Lasrado said.
However, the volatility in the currency is a cause of concern for Indian corporates. DD Rathi, wholetime director and CFO, Grasim Industries, said, ?Technically, there is a pressure on the rupee as inflows have reduced. Exporters have cut their sales and importers are in a panic situation. In the short-term, it appears that dollar is likely to remain strong.?
Stock market participants are also crossing their fingers on this development. Clearly, the IT sector is set to make a comeback if the currency remains weak. The BSE IT index was the highest gainer among all other sectoral indices on Tuesday, gaining 1.93% over the previous close.
However, Gupta reckons that if the fall continues unabatedly, the central bank would intervene by selling dollars for rupees so that the weakening stops to some extent. Overall, the rupee is expected to remain under pressure as oil and commodity prices remain high coupled with a widening trade deficit, rising inflation and slowing capital inflows.