rediff.com: Rupee slides to 45.03 per dollar

The Indian rupee breached the 45 per dollar level again on Monday, a little over a week after a central bank support package rescued it from its first dip through the psychologically key level.

Dealers said dollar demand was largely for oil imports. But analysts believed speculation over higher US interest rates played a role.

The rupee closed at 45.01/03 on Monday, after opening at 44.875/885, barely changed from Friday's close.

The Reserve Bank of India denies it targets any exchange rate level, but it raised interest rates and squeezed liquidity promptly when the rupee closed at 45 per dollar on July 21, prompting a recovery of little more than 0.5 per cent.

"This shows the failure of the interest rate policy. Typically, when you start fighting a depreciation, it starts happening. People are testing the market," Kamal Sen, director, Anand Rathi Securities, said.

The RBI said it was restoring interest rate differentials with the United States, and squeezing speculation in the currency market.

The RBI's moves were aimed at encouraging exporters to convert their earnings faster, but the possibility of a further US interest rate rise, after strong second quarter gross domestic product figures on Friday, will deter them.

"A new factor has emerged and that is the change in outlook for US interest rates," said Vasan Shridharan, regional economist at Standard Chartered Bank.

"That's negative for the rupee both in terms of reduced capital inflows and the overvalued real effective rate."

Foreign exchange dealers say that there is hardly any speculation in the market, but the dearth of exporter remittances and persistent demand for dollars from importers are the fundamental reasons for the rupee's weakening.

The RBI has promised to bridge any dollar supply gaps due to lumpy demand for items like oil purchases and debt repayments. But it spent $287 million in the week up to July 21, bridging gaps that could not be attributed to those factors.

Reserves, at $36.29 billion, are around $2 billion below their peak in mid-April.

The rupee has depreciated by just 3.5 per cent since the beginning of the year, which is relatively modest compared to what the dollar's strength has done to other currencies.

Analysts reckon the rupee on Monday slipped from 0.1 per cent overvalued to 0.2 per cent undervalued against a basket of major currencies, measured on a 1993-94 based index.

The RBI must now weigh whether to stand by its word that it is not wedded to any specific level, or recognise the timing of its support package has put a psychological premium on the 45 per dollar level.

Letting the rupee break decisively below 45 per dollar could result in a loss of face for the central bank. There is also a national sensitivity about the rupee/dollar rate.

A depreciation rate which reflects India's inflation rate differentials with the main currencies is deemed acceptable, although the authorities do not say so openly. Based on wholesale prices, India's inflation rate is running at around 6 per cent.

The real pressure point is the balance of payments, which after four years of surpluses, looks like deteriorating.

High oil prices and increased import demand due to faster economic growth, coupled with slack foreign capital inflows are likely to at least halve last year's $6.4 billion surplus, and some pessimists believe the surplus could be entirely wiped out in 2000-2001 (April-March).

Foreign investors have been net sellers of over $550 million worth of Indian equities in June and July and the benchmark Bombay index has fallen nearly 15 per cent in just over two weeks.

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Rupee slips to 45.03 per dollar