Rupee scales seven year peak
The rupee has appreciated by more than 9% over the past 8 months, closing at 43.04/05 levels against dollar.
By TNN |
MUMBAI: The rupee touched a 7-year high of 43.01 against the dollar, as the Reserve Bank of India chose to stay on the sidelines of the forex market on Thursday.
Exporters, however, bet on a dollar rebound, stashing their export proceeds in foreign currency accounts while importers bought the dollar at lower levels to cover their positions.
The local currency has appreciated by more than 9% over the past 8 months, closing at 43.04/05 levels against the dollar on Wednesday, compared to the 3-year low of 47, in July 2006. The rupee on Monday had ended at 43.29/30 levels. The rupee was propped up by high interest rates caused by tightness in money markets.
Call rates the day in a range of 7-9%, after rising to 30% during the day. The central bank infused a total of Rs 27,395 crore through the repo operations under the two sessions of liquidity adjustment. On the other hand, it mopped up bids worth Rs 3215 crore through reverse repo operations.
Once the local currency breaches the 43-mark against the dollar, then it’s quite possible to foresee a level of 42.50 in the next few days, contend senior treasury officials. A report by Barclays Capital has talked about the possibility of rupee finding support in the 41-40.8 range.
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However, exporters have already started postponing their receivables. On exposures, which are extremely short-term in nature, exporters are choosing to park funds in the exchange earners foreign currency (EEFC) accounts. They plan to convert these funds into rupees once current liquidity conditions ease and the local currency moves back to more secular levels over the next couple of weeks.“Liquidity conditions are expected to ease in the first week of April as most money market participants view the current rise more as a function of the tightness in liquidity than any currency market-related issue,” said a senior treasury official.
The onset of April will see government borrowing picking up, alongside payments of salaries. Among the exporter clan, the smaller rung of players is expected to be the worst-hit, as they do not seek much recourse to hedging instruments. TCS, for instance, has currently hedged up to $580 million, which accounts for about 70% of its net foreign currency exposure.
Analyst Hitesh Zaveri of Edelweiss Securities said for every percentage point increase in the rupee, there would be a 30-basis point impact on the operating margins of IT firms. The rupee rise impacts exporters in two ways: one through a hit in the sales figures and through a hit in the other income.
Importers had begun covering their positions ever since the rupee crossed the 43.50 mark against the dollar. Even current levels are feasible enough for importers, given the combination of 43.05 levels against the dollar alongside a forward premia of around 50 paise levels.
Industry officials now expect sharp activity in external commercial borrowings (ECBs), given the onset of the new financial year next week, which will bring in a fresh set of limits. Also, the fact that bank credit has turned costlier will further fuel this activity.
Most private sector banks are expected to lead the foray, with their issuances of medium term notes, perpetual debt and tier-II programmes. Foreign banks typically use such situations to withdraw funds from their Nostro-accounts and lend these funds in the local call money market.
On Wednesday, there was a huge sell-off in dollars as most money market participants sold dollars excessively, in a bid to generate rupee funds. Treasury officials were not expecting call rates to rise again after last week’s rise to 70% levels. According to most of them, the worst nightmare of rising call rates is clearly over after advance tax outflows of nearly Rs 35,000 crore left the system last week.
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Unfortunately, liquidity conditions came under pressure once again this week, as the RBI conducted the auction of bonds worth Rs 6,000 crore under the market stabilisation securities scheme on Wednesday. Wednesday was also the last trading day for players looking to net their positions in the current financial year. Hence, traders selling dollars on Thursday will not stand to receive the rupee funds before March 31.
Incidentally, the gains in the rupee come at a time when the dollar has been weakening against other currencies globally. Second, Chinese authorities have made statements announcing their plans to invest in overseas equity markets. Now, this would certainly necessitate drawing down some of their dollar-denominated deposits, further hurting the dollar.
Back home, both the finance ministry and the Reserve Bank of India have been voicing serious concerns on the spiralling inflation levels. Given these conditions, treasury managers expect that the RBI is unlikely to intervene aggressively in the foreign exchange markets, something it had actively done in November and December and further in January this year.
The central bank typically intervenes in the forex market by purchasing dollars, in a bid to protect the competitiveness of local exports. However, by doing this, it infuses rupee-denominated funds into the market, thus indirectly increasing the flow of liquidity and fuelling inflationary concerns.
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