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Nose Dive By Rupee Against Dollar

Category : NISM-Currency Derivatives

16th Dec, 2011;  Mohit Bansal -Intelivisto

The Forex market situation is turning into a catastrophe with rupee continuously looking bearish against dollar. The Indian rupee has touched new low of Rs 54.30/usd on Thursday 15th Dec, 2011. If compared with historical data, this is a decline of almost 5% in past week, 7% in past month and more than 19% decline in this year.

Reasons

The lingering euro zone debt crisis overseas and slow domestic economy are some of the major factors that are contributing to the misery.

India's industrial output shrunk by 5.1% in October vs 11.4% y-o-y after witnessing a sustained slowdown over the past few months, led by a steep fall in production of almost sectors, particularly manufacturing, mining and capital goods.

In addition continuous outflows of the foreign capital coupled with weak government policies are only adding to the misery. FII’s have sold of considerable amount of their investments in Indian market so far. The total outflow since Aug this year is closed to Rs 16,000 crores compared to inflow of Rs 6,000 crores.

American currency is still being perceived as safest heaven to park all the funds by investors and demand for the US dollar is peaking day by day. Australian and New Zealand dollar are trading at two week low against dollar. Dollar index trading above 80 levels also supports this sentiment.

The trade deficit has increased and is at the highest level since 1994 adding pressure to worst performing currency of Asia. Merchandise shipments to foreign grew at the slowest pace in two year, registering a weak a growth rate of 10.8% in November compared to last year because of the waning demand of engineering products and petroleum products in Europe where in major amount of import of Indian goods take place. 

Affects

India is the world’s largest importer of pulses, cooking oil and fertilizers, leaving it more vulnerable to currency risk. In last six days the rupee depreciated by 3% increase cost of importing crude oil by $ 11.5 million a day. India imports almost three-quarters of its oil requirements. Oil prices have gained 6.4% in New York this year.

Companies who borrowed heavily in US dollars due to lower interest rate compared to India will have to tackle losses in balance sheets this time around. Indian companies have raised $ 21bn loans through external commercial borrowings form Jan – July ’11 as against $ 18bn for the entire year 2010. Significant levels of foreign currency-denominated, especially dollar-denominated loans will result in forex losses for companies with dollar loans, because of increased interest payout and principal obligations occasioned by the declining rupee.

Moreover, imports of component, capital goods and raw materials have become more expensive. Companies with a high import component and those with foreign currency borrowings have the worst performing stocks in the market. This indirectly leads to joblessness as companies resort to cost cutting to check their losses.

Continuous decline adds to pressure on inflation which has stayed above 9 % since the start of December. Still, the central bank said on Oct. 25 that its 13 interest-rate increases since mid-March 2010 will help curb inflation and signaled it was nearing the end of monetary tightening. It predicted India’s economy will expand 7.6 percent in the year ending March 31, lower than the 8 percent it estimated earlier.

Sentiments

Intervention by RBI which it did on Friday helped market to surge a rally and register a gain of 2 % which is the highest in 2 years.

After the market closed on Thursday, 15th Dec, 2011 the Reserve Bank of India reduced trading limits for banks in the foreign exchange market, making it difficult for market players to keep speculative positions open for a long time.

While the measures should help reduce speculative volatility in the FX market, analysts poured cold water on the long-term effectiveness of these moves as the attractiveness of Indian assets have dropped sharply in recent months in the backdrop of a worsening domestic economic growth outlook.

There is strong sentiment of rupee touching Rs 55 in coming time as echoed by prominent analysts of Religare, ITI, Alpari and Kotak Mahindra Bank.

Kotak Mahindra Bank strategists said fundamentals of a weaker domestic macro conditions and overall risk aversion in the global financial markets are expected to be the main drivers for the rupee.

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