Rupee follows global slide, hits all-time low against $ FIIs Dumping Indian Bonds Triggers Fall

Mumbai: The rupee weakened 90 paise against the dollar to close at a record low of 58.77 on Tuesday, moving in tandem with a slide in the value of most emerging market currencies, with the domestic currency and the Russian rouble leading the fall.
    The sharp fall in the value of the rupee will spur inflation and force the government to hike fuel prices. It also increases prices of local gold vis-à-vis international prices which will make the yellow metal appear like a sound investment despite efforts by the government to dissuade gold purchases. Besides making all imports expensive the weak rupee will make overseas travel and education more expensive.
    The present fall has been triggered by a massive selloff by foreign institutional investors in Indian bonds. In 18 sessions FIIs have sold bonds worth $4.7 billion.
    Though all emerging market currencies have weakened against the dollar, India will suffer the most because it has the largest current account deficit of $80bn after the US. Around $15bn inflow could be affected
    With QE (quantitative easing, through which the US government pumped in huge money into the financial system at low rates) being terminated earlier or on schedule, the implication will definitely mean fewer FII funds coming in, though there would still be positive flows. Around $15 billion could be affected—only affirmative policies within the economy can retain such flows, or else the balance of payments will be under pressure as this cushion will be less supportive," said Madan Sabnavis, chief economist, Care.
    Dealers said that there was a demand for dollars from public sector banks which appeared to be on behalf of defence purchases or oil refiners.
    "The depreciation of emerging market currencies is a global phenomenon. South Korea has also depreciated against the dollar and so have the Brazilian real and South African rand," said Ashish Vaidya, head of fixed income, currencies and commodities trading at UBS India. He added that RBI intervention has been mild because it sees this as a part of a global phenomenon. "The central bank is following a strategy of containing volatility and going with the trend," he added.
    Although there is no word from the Federal Reserve on withdrawal of stimulus, global funds appear to be bracing themselves to a possible early withdrawal of quantitative easing ahead of schedule. The three phases of quantitative easing (or QE1 to QE3) refer to the unconventional monetary measures adopted by the US Federal to inundate money markets with dollars by purchase of debt of up to $85bn every month. Signs of a recovery in US have raised expectations that the Fed would bring an early end to this practice.
    In the currency futures market, near-month dollar/ rupee contracts on the National Stock Exchange, MCXSX and the United Stock Exchange all closed around 58.88.

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

The rupee recorded one of its sharpest intraday falls to close at an all-time low of 58.14 against the dollar on Monday

Mumbai: , 107 paise lower than its previous close of 57.07 on Friday. The sharp fall has raised the spectre of high inflation and further slowdown in investments by businesses as all imports get costlier and businessmen face huge uncertainty. 
    Besides bringing about a general increase in prices, a weak rupee also directly hurts those who are planning to travel or study abroad. The fall in the rupee will make it difficult for the RBI to bring down inflation and stimulate growth as the depreciation increases fuel price. It also makes it difficult for RBI to cut interest rates as this would make it cheaper for traders to speculate on the dollar firming up further. 
BAD NEWS FOR... 

• Foreign travel, education, imports and foreign debt service for cos 

• Cars and home appliances with imported components 
GOOD NEWS FOR... 

• Remittances back home 

• Exporters Gradual slide in Re to boost exports, say bankers 
Mumbai: Monday's fall in the rupee was prompted by strong gains in the dollar in the international market, coupled with uncertainty in equity markets and a sell-off of bonds by foreign investors. 
    The previous low seen by the domestic currency was on June 22, 2012 when it touched 57.16 against the dollar. Since then the rupee recovered to touch a high of 51.88 in October before weakening again. The rupee has depreciated over 7% against the dollar during the current fiscal making it the worst performing currency in Asia. 
    According to Madan Sabnavis, chief economist with rating agency Care, the fundamental driving the rupee movement is ultimately the change in the country's foreign exchange reserves as decline in reserves would result in depreciation. Foreign currency assets, after increasing in the months of March and April, have declined to $258.50 billion in May. 
    Bankers say that while a gradually weakening rupee would have a self correcting effect by addressing the factors that led to the fall, the volatility could badly hurt the rupee. "A gradual depreciation would reduce import demand and promote exports. It would also make Indian assets attractive for foreign investors. But wild swings in the rupee hurt everybody. Exporters too will lose because of mark to market losses on their hedging positions on the rupee" said a trader with a multinational bank. 
    "The dollar has been strengthening against currencies of a number of emerging market economies. This is mainly owing to the expectation of the Federal Reserve discontinuing the quantitative easing programme sooner, resulting in fewer funds flowing down to the emerging markets. Also, the European Central Bank and the Bank of England maintained key interest rates at the same level. This would also provide for strengthening of the dollar," said Sabnavis.

Forced to prepay gold loan?

Here's what you can do if you have been asked by your bank to prepay the entire gold loan immediately or increase the collateral     Last week, Kochi-based Anjana Badoor discovered that the option to prepay a loan does not rest with the borrower after all. "I had taken a loan of 50,000 last year from a public-sector bank against jewellery roughly worth 75,000. Though the loan tenure was two years, I was asked to prepay the entire outstanding amount immediately," says the 53 year old. Given that she was servicing her EMIs on time and in full, Badoor can't understand what prompted her bank to force her to prepay the loan.      The reason is plummeting gold prices, which fell from 32,500 per 10 gm in September 2012 to below 27,000 in May 2013, a 17% drop. And yes, banks and NBFCs are within their rights to demand part prepayment or complete repayment of a loan. Says Harsh Roongta, chief executive officer of Apnapaisa.com: "The terms and conditions for loans against gold are similar to other products, such as shares or other types of collateral. So if there is a drop in the value of the collateral, financial institutions can insist on accelerated payments to safeguard their money."  Preventive measure  Till mid-2012, banks and NBFCs were allowed a loan-to-value (LTV) ratio of 80-95%. In other words, you could walk home with a loan that was 95% of the value of the collateral you put up. As is evident, a high LTV ratio will be seen as higher risk. "Now that the price of gold has come down, the worth of jewellery pledged by gold loan borrowers is less than that at the time of giving the loan," explains Rajiv Raj, co-founder and director atCreditVidya.com. He also adds, "Banks, therefore, run the risk of some borrowers defaulting on their loans." The default rates in leading gold loan companies are reportedly in the range of 7-9% of the total loans. As a preventive measure against collateral threat, they are likely to resort to prepayment notices.      The move by the central bank to cap the LTV limit for NBFCs to 60% in March 2012 is a safeguard mechanism, but it does nothing to protect loans that were disbursed earlier. These are the borrowers who need to be wary at the current juncture. According to Raj, if the LTV goes beyond the prescribed limit, lenders prefer to change the terms of the original deal. This isn't really a bolt from the blue since most lenders clearly mention in the terms and conditions that customers need to make good on the margin if the collateral value of the asset comes down.  Borrowers' options  The good news is that banks rarely resort to twisting the customers' arms as a start. Badoor happens to be unlucky to have been stuck with a panicked branch manager, who preferred to limit the risk exposure by calling in the entire outstanding amount. Ram Sangapure, general manager, Central Bank of India, explains that though banks have the right to recover the entire loan amount at any point, most refrain from doing so. "The possibility of a borrower defaulting would be higher if the banks force them to repay the entire amount at once. So most banks avoid doing so," he adds.      Moreover, banks are wary of selling the collateral as it may not always fetch the outstanding amount. Besides, organising the sale of collateral involves costs, and gold jewellery also runs the risk of depreciating by 15-20% on making charges, if auctioned.      According to Sangapure, banks typically offer two options to a borrower in case there is a sharp drop in the value of the collateral. "The first one is part-payment of the outstanding principal amount, wherein the LTV ratio becomes appropriate again," he says. Here, the customer may have to pay just the minimum outstanding principal to get the ratio right. Though prepayment penalties on gold loans are rare, experts confirm that the banks/NBFCs charging this fee waive it if they exercise their right to an early foreclosure.      Alternatively, banks may ask for a rise in the pledged collateral. "Most borrowers would prefer to take the second route if they are sure of repaying their dues and recovering their jewellery," adds Sangapure.  If you are stranded  Badoor is thankful that she had taken a relatively small loan and managed to repay it by borrowing from friends. However, this option may not be open to everybody. If you are slapped with a notice for an immediate prepayment or increased collateral, but are unable to opt for either, don't panic.      Explain the situation to the bank and it is likely to work out a mutually agreeable solution. For instance, you could ask your branch manager to be allowed to pay the difference in the LTV ratio. If you are expecting some cash flow in the near future, leverage on this windfall. As long as you have a good credit record, your bank is likely to extend you grace period. Unfortunately, the chances of being able to negotiate on your EMI are slim. "The lenders will not agree to alternatives such as a higher interest rate for the same collateral since they need to report these instances to the regulator," says Raj.      The one thing you need to be careful about is not defaulting on the loan. For, you will not only lose your pledged jewellery, but will also ruin your credit score, making it difficult to land any other loan in the future.