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Rupee hits new depth

Kishori Gopalkrishnan in Bombay

On a day when the various markets tumbled, the foreign exchange market today went into a tailspin in the wake of continuing political uncertainty at the Centre which resulted in heavy corporate demand, with the rupee plunging to a historic low of Rs 38.55 per dollar, while the Bombay Stock Exchange's Sensex plummeted 120 points and the National Stock Exchange's Nifty lost 24 points.

The rupee's fall on Monday was a result of the heavy import remittances and the political fluidity at the Centre, coupled with the Union government's decision to free the petroleum sector from administered price mechanism by the turn of century, traders in Bombay said.

The dollar opened with heavy demand from importers and commercial banks to clear their remittances and was quoted in the range of Rs 37.75 and Rs 37.95. Leading dealers in Bombay said this was a rare case when the brokers are keeping the spread of 20 paise in bid offer quotes.

Another dealer said that the State Bank of India was in the market but it was purchasing the dollar through the brokers. The SBI bought dollars at Rs 38.33-35. After reaching Rs 38.50, the central bank, the Reserve Bank of India, intervened in the forward section which strengthened the Indian currency to Rs 38.21-35. But due to heavy demand again, the rupee once more rose sharply to Rs 38.41-49 during intraday trading. The rupee closed at Rs 38.07-15 per dollar.

Another trader pointed out that after opening at Rs 37.75-85 per dollar in early trading on the forex market, the rupee dropped further by 70 paisa. The rupee had touched a low of Rs 38.20-40 on February 6, 1996, since reverting to the Liberalised Exchange Rate Management System (Lerms).

The RBI fixed the reference rate of the dollar at Rs 38.39 per dollar, as against the previous close of Rs 37.47. The reference rate is based on 12-noon rates of few select banks in Bombay. The SDR-rupee rate is calculated at this rate.

The rupee's sharp fall against the dollar on Monday morning was arrested by profit-taking by some banks, dealers said. ``There have been good exporter (dollar) sales,'' a dealer said. ``Exporters are selling from 38.40 levels onwards.''

The RBI reportedly pumped in around $300 million during the day in intervention operations.

Forex analysts said that the rupee's fall was largely due to indifferent attitude of the RBI shown in the last couple of days when the central bank kept away from the market, leaving the rupee to find its own levels at the market place.

While market operators speculated over the rupee's next southward destiny to Rs 39.50 per dollar by the end of December, analysts felt that the currency would bounce back to find a suitable level at Rs 38.50 per dollar by the end of March 1998.

Bankers seemed confused over the current flux in the currency market, with some having doubts whether the fall is indeed a correction in the value of rupee. However, RBI officials felt that the current level of the Indian currency between Rs 38 and Rs 38.50 is comfortable and ideal.

Some dealers pointed out that the SBI also sold dollars, triggering a mild rupee rally. ``They bought in the morning and were later selling,'' claimed a dealer at a Bombay bank, referring to the SBI.

Another foreign bank dealer said ``the rupee recovered a bit on dollar sales by a few banks.'' He said the SBI was selling large amounts, adding, that the Reserve Bank of India sold forward dollars, but did not intervene in the spot dollar market.

Yet another dealer said that the Indian rupee rallied on large SBI buying which replaced the RBI as the main dollar supplier. ``There are clear signs that exporters are happy to sell at 38.40 and beyond so we do not see the rupee weakening much beyond that level,'' he said. ``We very clearly heard the outgoing RBI governor (C Rangarajan) say that the rupee had weakened enough and would be protected from further fall,'' he said. ``Then, the new governor also said his priorities are no different from those of his predeccessor...the market is definitely confused.''

The dealer added that the danger was that small importers and banks would be the to be ones badly hit by sharp volatility. ``The big boys have either the expertise or the staying power to take on this kind of swings, but the smaller ones will be badly affected.''

The RBI sold spot dollars, triggering a sharp rupee rally. The RBI's intervention took dealers by surprise as the rupee had reached a state of comparative stability after a steep fall on Monday morning when it touched a record low of 38.55.

The lack of aggressive RBI intervention last Friday and on Monday morning helped the rupee to slide fast to its historic low. Many dealers said the plunge appeared to be engineered by the RBI to help adjust the rupee to the sharp fall of the other regional currrencies. ``I personally think a rattled rupee is not good for the country because we have a lot of price-insensitive imports of POL (petroleum, oil and lubricants) items," said P H Ravikumar, senior vice president at ICICI Bank.

Hindustan Lever Limited Chairman K B Dadiseth said said that an over- priced currency in the face of devaluation among India's competitors in Southeast Asia will lead to underpricing of imports which will adversaly affect domestic growth and profitibility. This, in turn, will have a bearing on internal accruals and investment plans of domestic industry in subsequent periods, he added.

Operators maintained they were unnerved due to the prevailing political instability at the Centre. They felt the Congress demands would lead to the fall of the Gujral government.

Meanwhile, ANZ Grindlays Bank senior economist Barry Coulthrust said that the rupee may depreciate to Rs 40-levels in a period of six to 12 months. ``India should ensure adequate supervision of the banking system before full convertibility of the rupee is allowed,'' he added.

Certain new trends also emerged in the forex markets. Normally a big buyer of dollars, the State Bank of India did not show much buying interest initially. Some banks even reportedly sold dollars, prompted by the belief that the RBI will not allow the rupee to breach the 37.50 level in the near-term.

However, dollar buying by SBI at a later stage necessiated RBI intervention. The central bank, say sources, has pumped in more than $1 billion in the last few days to arrest the rupee's slide. While RBI sources expressed their resolve to continue intervening in order to even out volatile phases with forex reserves of over $26 billion, market experts like ANZ Bank General Manager Girija Pande are of the opinion that the RBI could face a problem since ``short-term flows from foreign insititutional investors and non-resident Indians constitute at least 50 per cent of this reserve.''

Pande made a strong pitch for the introduction of derivative instruments which, he felt, would add depth to the markets and drive out speculators from the stock as well as the forex markets. ``We will probably see a wider exchange rate which will target the inflation rate, rather then money supply,'' he said. He warned against unhedged dollar borrowing by corporates and non-banking financial companies.

Forex traders said that while the rupee depreciation was on account of heavy import covering, the cancellation of external commercial borrowings, slack supply of dollars and turbulence in the Southeast Asian markets could have also had a far- reaching impact on the forex inflows.

Cash spot closed at 0.25-0.50 paisa premium, cash tom at 0.00-0.125 premium and tom spot at 0.00-0.125 paisa premium. The monthly forwards (in paise) were 0.50-1 for November, 21- 25 for December, 48- 51 for January, 68- 72 for February, 89- 92 for March, 112- 115 for April and 135- 139 for May. The one- year forward was quoted at 237- 242 at the fag end of the day.

The six-month annualised premia closed at 7.24 per cent. Trading in the overseas markets was reported to be quiet and dull.

Back home, the pound sterling opened at Rs 63.96 and closed at Rs 64.43 against the rupee, showing a gain of 47 paise. The yen ended at Rs 29.98 (per 100 yen) and mark at Rs 21.97.

UNI