Sharp drop in Rupee vs Dollar, lowest level in 3 weeks

The rupee today dropped sharply to close at 40.51/53 against the US currency following crash in global equity markets on concerns over the US credit and housing markets.

According to forex dealers (NEW EDITION LINK)there was a rush to cover short dollar positions following sluggish US stock market over weakness in housing market and anxiety continued over the credit markets.

In active trade at the Interbank Foreign Exchange (Forex) market, the Indian unit opened sharply lower at 40.50/51 per dollar against Thursday's close of 40.34/35 a dollar.

Later, it gyrated in a wide range of 40.43 a dollar and 40.57 a dollar on alternate bouts of buying and selling before ending the day at 40.51/53, a steep fall of over 17 paise over the previous close.

Moderating inflation will enable India's central bank to hold interest rates steady at its policy review on Tuesday, although analysts said it could take steps to cut cash in circulation to help it manage robust capital flows.

“The rupee rose 0.2 per cent to 40.65 against the dollar as of the 5 pm close in Mumbai, according to data compiled by media.” - Re rises, biggest Q gain in 34 years, The Economic times, 2nd July 2007.

This news hit us all. This meant we’ll have higher bills to pay when we swipe our international credit cards in India, we’ll have to send ‘more’ while sending money to India and the plight of those who have some student loans from India to pay which they had taken at the rate of Rs.44 per dollar was understandable. But these thoughts made me feel bad about ourselves. Afterall India was growing stronger, and obviously the nation’s collective interests have to come before the individual’s.

Or atleast that’s what I thought until I learnt that the rise of rupee could thwart India, giving rise to a negative feedback mechanism.

“Sharp rise in rupee has begun to hurt, with exporters considering lay-offs, which could affect 2.75 lakh jobs, and the government mulling to scale down export target to last year’s level of $125 billion from the ambitious $160 billion set in April” - Rupee rise: 275,000 jobs may be chopped, Rediff money, 12th July 2007.

This happens when a country depends on foreign exchange for a considerable part of its GDP. Rise of rupee would mean, increase in the offshore expenses for many MNC’s and India’s IT job sector which is predominantly service based, offering its services to these MNC’s has to bare the brunt of it. Isn’t this is an abject situation, where the country is itself affected by the rise of its economy ?

The world has Interdependencies, but a country’s economy can go stable only when it depends more on its internally generated revenue than its foreign exchange. Service sectors are great, but in the long term it would be beneficial if the income required to meet the expenses of these sectors could be generated internally instead of depending on the foreign exchange. I obviously do not have a clear solution, but I do have a guideline. And economists! now its your time to work.

update:

A very informative and impartial outlook on this issue is here:

“Is the rising rupee good or bad for India? What impact will it have on the global competitiveness of Indian firms? Should the RBI or the Finance ministry intervene? Responding to these questions and more, experts at Wharton and elsewhere say that the rupee’s rise is the result of India’s growing ability to attract global capital. While this creates problems for some companies that earn most of their revenues in dollars — including IT giants such as Wipro, Infosys and TCS — it also creates opportunities for Indian firms by making it less expensive for them to acquire overseas assets. In addition, a strong rupee is good for the Indian consumer. It would be unwise for the government to intervene to force down the rupee’s value, they note.” - Currency Conundrum: Is the Strong Rupee Good or Bad for India?, Wharton School of Business, University of Pennsylvania.

A sharp rise in the Japanese Yen which hit a three-month high against the dollar mainly translated into a stronger dollar against other currencies primarily the high-yielding currencies, including Indian rupee, that were long-benefited from the carry trade.

It would be the second policy review in a row where interest rates have been held steady after the Reserve Bank of India raised the repo rate, its key short-term lending rate, five times between June last year and March this year to 7.75 per cent.

Not only has inflation moderated from two-year highs hit in January, but with the rupee having risen about 10pc against the dollar to nine-year highs, a rate rise could attract more foreign money.

"We do not expect change in policy rates as it has the potential to attract more capital inflows and its effectiveness in moderating aggregate demand and inflationary expectations in view of surplus liquidity conditions is very uncertain," the Securities Trading Corporation of India said in a note.

The reverse repo rate is at 6pc. It was last raised in July last year.

A Reuters poll of 11 economists earlier in July found the key rates were expected to be left unchanged, but more tightening was possible later this year if inflation picked up.

Annual inflation is running at 4.4pc, off a two-year peak of 6.7pc in January, and analysts say the tightenings since mid-last year are still working their way through the economy.

India grew 9.4pc in the fiscal year that ended in March and the central bank's forecast for 2007/08 is a strong 8.5pc, but there are some signs that activity is moderating, easing concerns about overheating. Credit growth has moderated to an annual pace of 24pc from an average of 30pc over the last three years, although it is still running faster than the central bank would like.

Business confidence fell sharply in the April-June quarter, mainly due to rising borrowing costs, according to the National Council of Applied Economic Research.

India's economy and its booming markets - the stock market has hit record highs 14 times this month - are attracting foreign money that is complicating liquidity management and pushing up the rupee.

Many emerging market currencies also posted losses yesterday on unwinding carry trades.

A fall of over 541 points in the benchmark Sensex, fifth largest decline in the history of the BSE, also dampened the rupee sentiment.

The month-end dollar demand from oil refinery companies too boosted the dollar demand.

Meanwhile, the global crude oil prices once again cross USD 75 a barrel mark in late Asian trade today.

Rupee / US Dollar Forex Currency News, Gold in India, and The Sensex index on the Bombay Stock Exchange (BSE). Euro / Rupee and Yen
The rupee fell to its lowest close in over three weeks on Friday, losing ground as a global equities sell-off saw foreign investors pare back their holdings of emerging market assets.

The rupee ended at 40.51/53 per dollar, its weakest finish since July 3, from a previous close of 40.3400/3450. It hit a nine-year high of 40.20 on Tuesday.

"The fact that the rupee did not fall further, given how much stocks fell, is what is remarkable -- it shows that there's still a lot of interest in the rupee," said the chief dealer with a corporate.

The benchmark share index fell 3.4 per cent, its biggest fall in almost four months, and other Asian markets were down sharply too after weak US housing data heightened worries about the health of the world's biggest economy.

Dealers said there was strong dollar buying in the offshore rupee market, an indication of the possible unwinding of carry trades, where investors borrow high-yielding units like the Japanese yen to fund investments in assets and currencies with higher returns, like the rupee.

The rupee, Asia's strongest currency against the dollar this year, has been bolstered by strong capital inflows, particularly into local equities, Dealers also said that month-end demand for dollars from oil refiners put pressure on the rupee, as did persistent but light intervention by the Reserve Bank of India (RBI).

Still, the rupee received support as exporters sold dollars when the rupee weakened past 40.50. In a note, JPMorgan said it expected the rupee to ease to 42 by the end of 2007.

"We expect the rupee to weaken owing to a possible moderation in net capital inflows and continued sizable foreign exchange operations by the RBI," the investment bank said.