The rupee depreciated 2.5% in the week ended May 7 with the sovereign crisis in Greece and potential problems in Spain and Portugal pushing the euro to a 14-month low against the dollar.
The euro saw a low of $1.2717 last Thursday, the weakest level since March 2009 and lost almost 4% over the week. The Indian currency lost 0.4% on Friday to close at Rs 45.47 against the dollar, from 45.31 on Thursday. It touched an intra-day low of 45.73, against the greenback, its weakest level since March 5, 2010.
So far, in 2010, however, the rupee has strengthened by almost 5.5% against the dollar after gaining 4.8% last year. Indusind Bank head (global markets) Moses Harding said, “There is nothing fundamentally wrong with the rupee except for fears of FIIs pulling out from the stock market and the bearish behaviour of the euro versus the greenback which is falling as if there is no end.” Harding observes that after the sharp recovery in the rupee over the past few months, the currency could touch 46 levels against the dollar driven by external factors.
ING Vysya Bank head trading (financial markets) RK Gurumurthy observes that in the short term, the sharp weakness of last few days will be corrected. “We may revisit the 44 level soon since with the 3G auction concluding there could be some fresh flows into the economy. This would once again put the rupee into the positive territory.”
At the same time, the Reserve Bank of India (RBI) could step in to supply dollars, thereby unwinding its earlier purchases from the market to limit rupee weakness beyond 46, points out Moses. Gurumurthy feels that there could be some more weakness as risk aversion could rise. A stronger correction on the bourses could mean more weakness for the rupee. That will be good news for exporters but could mean more expenses for importers.
Earlier this year, when exporters’ earnings were getting hurt, Infosys CFO S Balakrishnan had told FE his company would take a short-term view of hedges, not exceeding exposure to more than two quarters.
Firms like Sun Pharma, whose export revenues are expected to cross Rs 450 crore in 2010-11, have historically hedged an amount equivalent to six months’ net exports. When the rupee went all the way to Rs 39 levels, too it continued with that strategy. With the rupee softening, it’s possible those who didn’t get a chance to hedge their exposures earlier will do so now.
Meanwhile, China resorted to monetary tightening and raised cash reserve ratio by 50 basis points, last weekend. This caused a free-fall both in the Asian stocks and currencies. The local unit mirrored the trend. Last week, the won declined by 4.1% to 1,155.45 against the dollar, while the peso slid by 2.4% to 45.535. Malaysia’s ringgit dropped by 2.7%, while the rupiah gained by 0.1% to 9,225, thereby trimming its weekly loss to 2.4%, on suspected intervention by the central bank.
At the same time, Singapore’s dollar dropped by 1.9% to S$1.3933 and the Thai baht was little changed at 32.35.
The European Union has announced a $40 billion bailout package to rescue Greece out of the financial turmoil.