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