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Rupee hits a new low!

The rupee on Wednesday smashed through the Rs 40 barrier to end the day at Rs 40.13-15 per dollar, after touching an all-time intraday low of Rs 40.23.

The day started at Rs 39.89-94 compared to Tuesday's close of Rs 39.87-89 and slipped past the Rs 40 barrier within minutes. The rupee has weakened by over 12 per cent since August. However, compared to the currencies of most East and South-East Asian countries which have plunged around 30 per cent and more, the rupee appears a veritable island of stability.

In order to kill speculation, the Reserve Bank of India has adopted a series of measures which have slowed down the rupee's decline to a crawl. But the ongoing Asian economic crises, which show little signs of abating, have simply caused dollar inflows to dry up, leaving the market with only one way to go -- down.

Though experts insist that the country's economic fundamentals are in better shape than the battered Asian Tiger economies, they point out that India's markets and currency have been sucked down by a general withdrawal of funds from the region and the spillover effect.

"A change of sentiment is the need of the hour,'' says Moses Harding, vice-president, foreign exchange, IndusInd Bank, "The RBI should try and keep the rupee very steady for at least two trading days, which may bring in some (dollar) sellers onto the stage.''

Traders point out that only spot dollar sales by the RBI can reverse the rupee's downward trend. However, the central bank, during the earlier part of the day, limited its intervention to the forward market.

The RBI intervention has been mostly in the swap market which is reserve-neutral. The RBI intervened in the spot market only after the rupee sank to the 40.20 level on Wednesday. Analysts say a further fall would be easier now that the psychological 40-per dollar hump has been crossed.

"There is no run on the rupee,'' says a forex dealer at the State Bank of India. "It has been weakening steadily at seven to 10 paise every day.''

A treasurer at ANZ Grindlays Bank maintained that traders were unsure whether the RBI's grip on the market was as tight as it looked. "It is a deceptive situation,'' the banker, who did not want to be identified, said. "It almost looks like the RBI has run out of ammunition.''

"The market was nervous about what the RBI would do in the morning,'' said another dealer, who also sought anonymity, "when the dollar was quoting at Rs 40.15-18, a historic low.''

"The SBI was feeding the market at Rs 40.15 levels,'' says A Unni, a dealer with the Punjab National Bank, referring to dollar supplies by the country's largest commercial bank.

Unni said the fact that the RBI did not intervene when the Rs 40 per dollar level was breached was very significant. "It has not created any alarm bells at the RBI,'' he said.

As the rupee crossed the 40 barrier, corporates's dollar demand increased, leading to a further weakening of the rupee. However, few expect a free fall of the rupee.

Last week, the RBI had effectively banned speculation in the interbank market by ordering dealers to end each day with square positions. In December, it had banned Indian firms from cancelling and rebooking foreign exchange contracts.

Dealers said this was prompted by the belief that corporates were speculating that the rupee would follow other Asian currencies on the slide. The rupee has weakened by 12 per cent against the dollar since mid-August, but has been cushioned from the worst excesses of the Asian currency crisis by not being convertible on the capital account.

Says Ravi Kumar, chief dealer at ABN-AMRO Bank, "We are looking at a 40-42 (rupees to the dollar) band for the first quarter of 1998.'' He said Indian importers were keenly watching the developments in South-East Asia. "If the major Asian currencies stabilise, it would have a positive impact on the Indian rupee,'' he said.

The ban on running overnight positions has demoralised interbank market makers, dealers said, with several of them now not interested in dealing but only in brokering.

To make matters worse, portfolio investment by foreign institutional investors fell by $ 4.7 million between January 1 and 8, according to a Securities and Exchange Board of India statement on Friday.

The market regulator said that net FII investments dropped by $ 155.4 million in December, the second straight month of net outflows as foreign investors began pulling out of the troubled region.

The only dollar suppliers in recent months have been either the central bank or the SBI.

Moreover, corporates have noted the official reaction to the rupee's slide. The finance secretary had commented that the government was not alarmed at the rupee's dip below the key Rs 40 per dollar level.

"Though the dollar has hardened against all currencies in the past few days, focusing on the rupee-dollar gives an exaggerated picture of the situation,'' Finance Secretary Montek Singh Ahluwalia is reported to have said in New Delhi.

Meanwhile, several industrialists maintained that the rupee should stabilise at the new, weaker level after it breached the crucial 40 per dollar barrier in early morning trade.

Said Keshub Mahindra, chairman of automobile giant Mahindra & Mahindra Ltd, "I expect the rupee to stabilise at the new level. It (the rupee level) should stabilise. But we have to see how the East Asian currencies will go.''

S D Kulkarni, managing director and chief executive officer of Larsen & Toubro Ltd, said the rupee's fall clearly showed that India was no longer cut-off from developments in the neighbouring countries. "Current levels should be okay,'' he felt.

"There is no insulation. The depreciation of the South-East Asian currencies is going to have some impact on us. There has to be some sort of competitive devaluation,'' he added.

EARLIER REPORTS:
Rupee losing ground steadily