Oil dollar demand partly back in market but Indian rupee holds steady

Nov 08 2013, 08:34 IST
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SummaryJunk status if next govt doesn’t revive growth, but BBB- for now: S&P

While the rupee slipped to a five-week low in intra-day trades on Thursday after Standard and Poor’s observation it was possible India’s rating could be lowered to speculative grade after general elections if the government in office did not appear capable of reversing growth, the currency regained value later in the day. Although S&P reaffirmed its negative outlook on India’s BBB- sovereign rating, the spectre of a possible future downgrade hurt sentiment and the recovery in the rupee was attributed to reported intervention by the Reserve Bank of India (RBI). The fact that at least a third of estimated monthly purchases of $8 billion, by oil marketing companies, was back in the market was confirmed by the government.

The currency markets also appear to have taken heart from the $15.2 billion attracted through the FCNR(B) and Tier I capital schemes, which experts say would have a salutary effect on the markets given it buffers the RBI’s reserves. Economic affairs secretary Arvind Mayaram told newspersons that approximately “30-40% of oil dollar demand has returned to the markets” adding additional demand would be balanced by dollar inflows. “Strong dollar inflows through the FCNR window and the Tier 1 capital route and export realisations will help strengthen the rupee,” Mayaram observed. With this, the process of normalising the foreign exchange markets has begun.

The currency slipped to levels of 62.76 intra-day, a five-week low but closed at 62.41/$, unchanged over Wednesday’s close when it lost 1.2%, with OMCs starting to pick up a part of their dollar requirements from the market. The rupee has weakened 1.47% over the last five days, primarily due to the strengthening of the dollar, much in line with other emerging market currencies like the Indonesian rupiah, the Turkish lira and the South African rand which have also lost 1-2%.

Hitendra Dave, MD and head of global markets at HSBC, pointed out that the central bank had reiterated oil demand would be brought back into the market in a calibrated manner. “A knee-jerk reaction on the currency may not be warranted,” Dave observed. NS Venkatesh, treasurer at IDBI Bank believes the rupee should settle in a range of 61-62.50/$ as oil demand will be balanced by strong FII flows into the equity markets and a pick-up in exports.

Indranil Sen Gupta, India economist, Bank of America-Merrill Lynch said in a recent report that it was imperative to arrest

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