Data released by RBI showed that foreign exchange reserves rose by $2 billion to $289.39 billion in the week to June 15. The increase in reserves was on account of appreciation of assets in non-dollar currency such as euro and UK pound, dealers said. Bankers also said that absence of dollar supply in the international market was forcing Indian companies to replace dollar loans with rupee debt as a result of which credit growth during the current fiscal up to (June 1) continued to be high at 18.3% .
The rupee’s fall also took its toll on the sensex which closed 60 points lower at 16,972 after touching an intra-day high of 17,016. In the absence of capital flows and a continuing current account deficit, dealers are saying that there is no telling how low the rupee can go. Although foreign institutional investors have been net buyers this year in recent days they have been selling stocks.
For India the bad news this week has been a warning from Fitch which revised the outlook for the country to negative. The Fitch action comes on the back of a warning from Standard & Poor’s that India could be downgraded to junk status. The rupee traded at 58.14 in the three-month forward market compared to 57.36 on Thursday. In the offshore non-deliverable forward market (where forward contracts on the rupee are settled in dollars) three month deals were struck at 58.34 indicating that foreign investors expect the currency to weaken further.
Why is the rupee falling despite macroeconomic fundamentals remaining steady? The present weakening of the rupee is linked to a risk-averse sentiment. Importers are buying ahead of their requirement in the fear that the rupee could fall further. This is largely because of global factors with the dollar index near its all-time high; Moody’s downgrading global banks and Eurozone showing no signs of resolving. Investors are also disappointed that the US Fed has not announced a fresh round of monetary easing.
When will the rupee steady? To a certain extent the fall already has a self-corrective element built in. Dealers say that all it needs is one positive development in the global markets to compel exporters to start booking profits. Such a turnaround could push the rupee back to 54-55 levels soon. Since every day the rupee sees a new fall, technically there are no new resistance levels. However, dealers feel that exporters and importers would review their position once the rupee hits 58.
How does the fall impact the economy? As far as fuel costs are concerned, the recent depreciation in the rupee has been almost entirely offset by the fall in global oil prices, which constitutes nearly a third of the import. While in the short term the fall will add to inflationary pressures, in the medium term it will help in rebalancing the trade account by curbing imports and boosting exports.
Which businesses lose and which ones benefit? Besides oil, the other large import items are gold, coal, diamonds and copper. The increase in price of coal will adversely impact the power and steel industry and push up prices for consumers. Auto and electronics industry with high import content will also be hit as the slowdown has reduced their ability to pass on cost increases. Businesses that benefit include IT, textiles, and engineering goods.