Domestic troubles drag down rupee

The rupee had a forgettable fortnight, breaching by a wide margin, the psychologically crucial level of 50 per US dollar. Declining on all days except one, the INR fell as much as 4.5 per cent during the fortnight and is currently at its 32-month low of 51.34 against the dollar. This is within striking distance of its all-time low (Rs 51.97) against the greenback, seen during March 2009. The sharp decline in the currency could aggravate inflationary pressure by pegging up the cost of imported goods including crude oil.

Ongoing jitters about the debt crisis in Europe and increasing concerns on the domestic economic front accelerated the ongoing ‘flight to dollar safety'.

Europe continued to occupy centre-stage in the currency markets with sentiments see-sawing on whether the debt crisis there would ease or escalate.

The change of leadership in Greece and Italy raised hopes that strict fiscal austerity measures would get pushed through in those countries.

However, later, there were renewed concerns about the debt crisis deteriorating with the auction of Italian and Spanish bonds reportedly not going as well as expected, and the European Central bank having to step in to fill the gap . Consequently, the Euro ended almost 2 per cent lower against the dollar over the last fortnight, and currently yields $1.35 compared with $1.38 on November 4.

Macro woes

However, heightened domestic concerns in India translated into the rupee losing sharply against the euro too.

The rupee, in fact weakened against most major currencies, with the Euro currently yielding Rs 69.43, more than 2 per cent higher from a fortnight ago.

On the domestic front, latest inflation numbers which were still uncomfortably high, dismal industrial growth numbers (lowest in two years), and a disappointing earnings season which saw a sharp decline in India Inc's profits contributed to investor gloom.

The Sensex fell around 7 per cent over the past two weeks, and FIIs were net sellers to the tune of around Rs 700 crore.

There were also reports of importers buying large quantums of dollars to meet their obligations.

Besides, there were increasing doubts about the Government being able to meet its disinvestment and deficit targets this fiscal. All these factors seem to have contributed to the rupee's pain.

Also, comments by the RBI Deputy Governor, Dr. Subir Gokarn, last Thursday that the central bank would intervene in the forex markets only to check volatility and not to fix rates, further weakened market sentiment against the INR.

In fact, the sharpest drop in the rupee came last Friday (the rupee fell almost 1 per cent against the dollar and breached the 51 mark).

Calls for intervention by the RBI to stem the rupee's fall have been getting louder.

It remains to be seen if and when the central bank will intervene. One factor which may help the rupee in the days ahead is the Government's decision to allow FIIs to invest $5 billion more in government securities and corporate bonds.

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