Rupee falls sharply to the dollar as pandemic resurgence grips Europe

By Administrator_India

Capital Sands

The Indian rupee depreciated sharply on Monday as Europe got under a renewed grip of the coronavirus pandemic and risk aversion pushed the dollar index higher.

The rupee fell about 24 paise on Monday to close at 73.85 a dollar as the dollar appreciated against major currencies, and nationalised banks bought dollars from the markets to meet month end oil import bills. The dollar index rose 0.27 per cent to 93.02 against major global currencies.

Though it was not clear if the Reserve Bank of India (RBI) bought dollars to boost its reserves further, currency dealers say at $555 billion, the reserves are more than adequate and the central bank could be almost done boosting its reserves.

In that scenario, if the portfolio inflows remain strong, rupee should naturally strengthen. But that is not happening for some time because a strong rupee is detrimental to the interest of exporters and the central bank may not want to hurt the exporters further at a time when the overall export pie is shrinking.

Besides, the dollar accumulation is adding to the liquidity in the banking system, a prerequisite to keep bond yields low and for effective transmission, say currency dealers. “The RBI is not letting the rupee appreciate much to take advantage of the recent strength in the Chinese currency,” said Abhishek Goenka, managing director and CEO of IFA Global.

But the Chinese renminbi also weakened by 0.44 per cent on Monday, followed by the rupee in Asia. The rupee fell 0.34 per cent against the dollar.

“Like all other Asian currencies, the rupee is following the dollar closely. If there is a sudden dollar weakness, rupee should appreciate, but chances of that happening are less in the short term,” said Goenka, predicting a rupee range of 72.5-75 a dollar for the next few months. CR Forex Managing Director Amit Pabari expects rupee to be in the range of 72.50 to 73.50 a dollar, as the greenback weakness will likely persist, pushing rupee and other emerging markets currencies to strengthen along with the Chinese renminbi.

In the immediate term, though, Europe’s surge in Covid is weighing heavy on the local markets and for the rupee exchange rate. There are rumours that France, Spain, and Italy could impose complete lockdown, and that pushed investors to the relative safety of the dollar. In India, BSE’s equity index Sensex fell 540 points, or 1.33 per cent, impacting the rupee.

“The Indian rupee depreciated against the dollar and posted its worst day in over one month as risk appetite waned in the region due to surging coronavirus cases in Europe and the United States pushed investors towards the safe-haven dollar,” said Sriram Iyer, senior research analyst at Reliance Securities. However, when the world comes to a grip over the pandemic, there is a good chance that the rupee could see sharp appreciation, say some dealers.

That factor is reflected in the fact that both importer and exporters are not hedging for a longer period, but are taking exposure only for a month or so. Dollar hedging cost is also just 3 per cent (annualised) for one month, against the 4-5 per cent level seen earlier.

Dealers say the hedging discipline has also come down sharply and most are preferring to not incur the extra cost of hedging. That is because people don’t believe the rupee can depreciate much from here and the RBI won’t let the rupee appreciate without ringing ample alarm bells. And if there is a sudden volatility, RBI’s huge dollar reserves can always come into rescue.

“Rupee can appreciate by March, but it is unlikely that it will breach the 72-a-dollar mark. The RBI may not let that happen,” said Satyajit Kanjilal, managing director and CEO at Forexserve.

However, some say there is much ground for the rupee to lose. Samir Lodha, managing director of QuantArt, said rupee should reach 74 a dollar by December and 77 by March.