Re falls to another record low of 58.40 RBI Intervention Pulls Back Currency From Levels Close To 59 Against Dollar

Mumbai: The rupee neared levels of 59 against the dollar on Tuesday before intervention by the Reserve Bank of India through public sector banks pulled the domestic currency back to close at 58.40 – another record low and down 25 paise from its previous close. 

    RBI also ordered all exporters in Special Economic Zones to repatriate full value of exports within a period of 12 months from date of export. Earlier, there was no time limit for repatriating proceeds of exports from SEZs. Dealers said that although RBI appears to have sold dollars through some public sector banks, there was no major intervention. 
    "The recovery from 58.98 was so swift that it appeared that there was not much of dollar demand at the higher level. There is a view that the rupee has breached its fundamental levels while the weakening has been stemmed, it might take some major action for the rupee to reverse it movement," said Harihar Krishnamoorthy, treasurer, First Rand Bank. He added that there has been some buzz in the market of a dollar bond by the government. According to bankers, RBI has not come out with sledgehammer measures to stamp out volatility because dollar has been gaining against currencies globally. "Even in other Asian countries like Malaysia, Thailand and Indonesia, there has been a currency rout," said Krishnamoorthy. 
    According to dealers, one of the reasons why the rupee has been hit harder than other emerging markets has been the sell-off in the bond markets. "Conventional wisdom is that if you have a large current account deficit, you raise interest rates," said a banker. The sell-off in the bond markets has raised fears that RBI may hike rates in its mid-quarter review on June 17. Fears of currency-related losses for corporates and an interest rate hike led to the sensex falling 1.53% on Tuesday. 
    While the sharp fall in the value of the rupee has taken traders by surprise, there is no panic in the market. Some bankers feel that there is some irrationality in funds moving back to US treasuries as it is unlikely that the US Federal Reserve would withdraw the fiscal stimulus immediately. 
WHAT RBI CAN DO TO SUPPORT RUPEE 
Float a global bond issue | A $10bn mop-up would immediately turn sentiment 
Ask exporters to bring in funds | This has been another favourite tool of RBI to curb speculation among exporters and importers 
Hike interest rates | Higher rates create an arbitrage opportunity for banks to bring in dollars, convert them into rupees and lend them in local markets Sell dollars | RBI's dollar stash stood at $287.8 bn on May 31, down $4bn from the previous week; a sharp burst of dollar sales coupled with other measures could stem the slide 
Ease ECB norms | RBI follows a counter cyclical approach — it allows corporates to borrow more overseas when the currency is weaker than its fundamentals and places restrictions when it appears overvalued