The Rupee on shaky turf

The rupee has once again baffled corporate CFOs, currency traders and small exporters. Just when foreign exchange dealers felt that they would make a killing by shorting the dollar, the greenback has started hardening against the local currency. On Wednesday, the rupee briefly breached the 50-mark against the dollar to end at 49.97, with the market beginning to price in political risk, fiscal slippages and a decline in the interest of foreign fund houses in emerging market assets. The local unit had closed at 48.66 on Tuesday. What’s pushing up the dollar in the international market is the strong demand from central banks for US treasury bills. Despite the slowdown and abysmal returns from US T-bills, funds, banks and sovereigns are buying these bonds, which are still perceived as a safe haven. In the face of these forces, the domestic currency market largely ignored RBI governor D Subbarao’s statement that lower inflation and current account deficit in the coming months could raise the possibility of a rate cut. Some state-owned banks sold dollars to prevent the rupee from dropping further, but this did not help. The exchange rate movements could upset the hedging strategy of several companies. In the past one year, exporters have lost out, having locked in at unattractive levels while importers took the hit as the rupee slipped. Fears of a fall in NRI remittance are also adding to the pressure on rupee. For the past few months, high remittances from regions like the Middle-East had given some support to the local currency. But following reports of job losses and wage cuts in the UAE and Bahrain, analysts are worried that this inflow could be lower. The downswing in Asian stocks is also fuelling the rush for the dollar. The euro and the pound also hit multi-week lows versus the dollar on Wednesday amid concerns of recession and a further fall in interest rates. “The lack of any stimulus in the interim Budget has greatly soured the mood for capital inflows and in turn, for the local currency.