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Rupee crashes as RBI stays quiet

Kishore Gopalkrishnan and A K Diwanji in Bombay

The rupee weakened to a new record low of 39.30 per dollar on Monday on sustained demand for the US currency from corporates and commercial banks while the Reserve Bank of India stayed off the market. The rupee had also crashed last Monday.

The currency, which opened on high expectations of stability following certain corrective measures announced by the RBI on Friday, literally went through the roof in the absence of any support from the RBI and hit an all-time low of Rs 39.30 per dollar and finally closed at Rs 39.25.

Traders pointed out that it was when the State Bank of India came later in the day to buy dollars to the tune of over $ 100 million that the rupee crashed to its record low of 39.25-30 towards the end.

However, while the central bank stayed away from the forex market, RBI Governor Bimal Jalan reportedly had a meeting with caretaker Finance Minister Palaniappan Chidambaram. The RBI refused to confirm or deny Jalan's presence in Delhi.

Angshuman Chaudhary, head of funds management, ANZ Grindlays, linked the RBI's absence to the political turmoil in New Delhi. "The virtual absence of a government let the RBI feel free of political pressure to intervene and save the rupee, and it must have decided to let the market forces decide," he said. "There is no point in intervening when the demand for the dollar is so high because it will all be consumed, causing losses to the RBI."

Another dealer seconded Chaudhary. "The RBI checked for prices but did not hit any bank,'' he said. "Maybe they were waiting to see how far the market would take the rupee or maybe the fact that there is no government is playing on their minds.''

Said Kamla Aithan, vice-president, Mecklai Financial & Commercial Services Ltd, "Given the steep fall, one would have expected the RBI to intervene today." She attributed to the fall to dollar demand and the fact that banks have greater liberty to purchase now. "Ever since the credit policy announced in April last, overnight limits have gone up," she added.

Another dealer provided an possible reason. "The rupee dropped a few paise every hour or so without any sharp move. Maybe this is the reason the RBI kept off the market,'' he said.

"Had the RBI intervened," says Aditya Gokhale, an analyst at Lloyds Finance, "the rupee would have settled down somewhere at the Rs 39.00-05 level. Heavy dollar buying by leading commercial banks on behalf of corporate sectors has created a panic-like situation in the market.''

Meanwhile, the Reserve Bank of India today warned corporates that in respect of non-trade related transactions, contracts once cancelled should not be rebooked for the same underlying exposure.

In a statement issued late on Monday, the apex bank stated that during the recent scrutiny of banks by the RBI, it has been observed that a number of corporates which have long-term repayment commitments as well as those which run exposures on account of foreign currency balances retained abroad since long, have been using the volatility in the market to take a view on the currency movements. While it has recognised that corporates need to hedge their exposures, in the current scenario, excessive speculation on currency movements needs to be curbed, the RBI warned.

Therefore, it has been decided that in respect of non-trade related transactions, contracts once cancelled should not be rebooked for the same underlying exposure, said the RBI. It will, however, be open to corporates to rollover these contracts on maturity at ongoing rates, the release added.

In the afternoon, dealers said trades were done up to Rs 39.30, with no signs of support from the RBI for the rupee. The rupee opened on Monday at 38.60-70 per dollar, slightly weaker from its weekend close of 38.55-58 and started dipping straightaway, dealers said.

"There was some hesitation on the part of corporates till Rs 38.80 was reached,'' said a dealer at a private bank. "But once this was breached, the fall became more pronounced.'' Dealers said the rupee fell in the forward market, tracking the movement in the spot market and fears of tighter liquidity in the domestic money market.

Though the rupee plummeted to an all-time low against the US dollar during the day on Monday, there are people who believe the Indian currency is still to reach its ``real value.''

Said Chaudhary, "The rupee is likely to go further down on a Real Effective Exchange Value to a level which should reflect the realistic value of the rupee."

"The key issue is what level of correction is appropriate at this stage and how will this correction be phased over time,'' Hindustan Lever Limited Chairman Keki B Dadiseth said.

Aithan pointed out that there are expectation of the rupee declining by Re 1 per month down to Rs 40.00 to 40.50. "In my personal opinion, if the RBI stays away, the rupee will go down to Rs 42," she said, adding that the RBI didn't want the rupee to appreciate.

Another public sector bank's treasury manager said, "There is no particular massive dollar buying by corporates. Hence, the forex market doesn't seem to have swelled only because of the corporate demand for dollars.

"The speculators are testing the levels,'' he said, suggesting that "the RBI did not come out with a statement as it was probably concerned that attaching a value to the rupee would have resulted in hammering of the rupee below the indicated value.''

Another treasury manager added, "I am confused. I thought the RBI will not allow the rupee to slip past 38. If you allow markets to determine the rupee value, you will not know when the flight will be averted. It can be hammered from 39 to 40 and so on,'' he felt. "Once you allow the rupee to slide, you will always find speculators to pull the Indian currency down and down,'' he added.

A senior banker said, "Speculators most of the time turn out to be right,'' predicting the slide of the rupee to 41.50 to 42 by March 1998. "Exporters want the rupee to depreciate. Those doing both export and import are mum,'' he said, reflecting the prevailing mood.

However, Chaudhary said the rupee's fall over the past few days can produce a demand for dollars, fuelling the drop. He pointed out that markets tend to overshoot the real value but should that happen, the rupee is likely to claw back to its real value. He refused to guess the final level.

Chidambaram had told an Asian Development Bank seminar a few weeks ago, that "in the short term, exchange rate adjustment is an unavoidable price that developing countries have to be prepared to pay to stem certain outflows.''

Traders maintain that it could be these comments which reinforced market perceptions that the RBI wants a weaker rupee.

Dealers claimed that foreign capital has beginning to leave India due to worries that the rupee will have to weaken to realign it with the changed environment posed by collapsed currencies elsewhere in Asia, traders maintained. Political fears also pressured the rupee, dealers added.

However, analysts said that the political uncertainty at the Centre was only one part the rupee's troubles. The real pressure on the currency, they said, came from a belief that India needs to readjust the rupee following the sharp falls in other Asian currencies in the past few months. Today's drop, traders maintained, appears relatively minor when compared to falls of up to 35 per cent in some other Asian currencies, led by the Thai baht and Indonesian rupiah. Even the Singapore dollar, a regional heavyweight, is down 10 per cent since July, they added.

"It does appear that the RBI is looking at a weaker rupee which also fits into the general market perception that it has to be weaker to compete with falling Asian currencies elsewhere,'' said the chief currency dealer at a foreign bank in Bombay.

Chaudhary said due to the accumulated unhedged dollars, the rupee could in the short-run overshoot its natural position, which perhaps will take the rupee down. He pointed out that dealers in Hong Kong and Singapore are looking at Rs 40 per dollar, but had not accounted for the prevailing political turmoil which could hurt the rupee further.

Chaudhary, said there were two possibilities. "First, the absence of a government means there is no one to take the blame over the level of the rupee. The RBI might not intervene as they might have otherwise under political pressure.

"Second, the RBI might want to set a level for everyone to speculate within prudential levels. The RBI will cushion the fall, but not stop it," he added. He pointed out that the RBI has already tightened up the liquidity by postponing the first phase of the cash reserve ratio.

S P Gupta, director of the Indian Council for Research on International Economic Relations, said there was a growing feeling that the rupee should be nearer 40 to the dollar and ``the sooner the better.''

Last Friday, when the RBI had announced a package of measures to speed up inward remittances of foreign currency by exporters and to mop up excess domestic liquidity to prevent banks using the extra funds to speculate in forex market.

Dealers said forward premiums had risen on corporate demand. ``There has been some booking of forward cover in near months in particular,'' said a dealer. ``Premiums are up across the board largely in reaction to the weakening in spot. The prospect of a tightening in domestic liquidity has also hit sentiment.''

The premium for six-month dollars was quoted at 7.42 per cent in late morning against the weekend close of 6.51 per cent, traders added.

The Reserve Bank of India has fixed the reference rate at Rs 38.78 per dollar as against Friday's rate of Rs 38.57.