The rupee weakened by 2.84% on Tuesday, the biggest intra-day fall in percentage terms since 1996, to a fresh all-time low on the back of a broad sell-off across Asian currencies and domestic economic concerns.
The currency ended at an all-time low of 66.19/$, the worst performer in Asia. Most other currencies were down less than 1% barring Indonesian rupiah that fell 4%.
At 66, the rupee is down 18% since April 1, this year, and will add at least 100 basis points to the wholesale price inflation, perhaps upsetting RBI’s year-end projection of 5%. The WPI inflation has already risen to 5.79% in July.
?A broad sell-off of all currencies has weighed on rupee as well. Also given that rating agencies are watching the situation, there is a fear of some impact on the rating outlook,? said a senior forex trader at a foreign bank.
On Monday, Fitch Ratings had warned it may downgrade India’s sovereign rating, noting that the fall of the currency along with the subsidy pressure from the food security Bill could hamper fiscal improvement. The food security Bill was passed by the Lok Sabha on Monday.
The spectre of tapering of the US Federal Reserve’s quantitative easing (QE) also continues to hurt all emerging market currencies, including the rupee. Since May 22, when the US Federal Reserve hinted at a pullback in QE, the rupee has lost 16%, the steepest fall among emerging market currencies. Currencies of countries such as Brazil, South Africa, Indonesia and Turkey that have current account deficit like India have fallen close to 14%.
Intraday, the rupee had recovered due to large dollar sale by public sector banks possibly at the behest of the Reserve Bank of India, dealers said.
?There were outflows, linked to oil importers and others as well and there was some intervention too,? said Ashish Parthasarthy, head of treasury at HDFC Bank.
Contrary to popular perception that low volumes have been exacerbating the volatility in the currency markets, RBI data show forex market turnover has fallen only marginally after RBI’s measures took effect.
The daily average forex turnover on the interbank segment was around $8 billion before July 15 when RBI announced first set of liquidity tightening measures to prop up the rupee. On the merchant desk ? positions taken by banks on behalf of companies ? the turnover was $2 billion. The measures and those that followed in the fortnights later on were said to have drastically limited the volume in the market.
However, in the fortnight following the July 15 measures, the average daily turnover in the interbank segment was around only marginally lower at $7 billion and that of the merchant desk remained around $2 billion.
Dealers say although the overall market turnover arrived at the end of the trading day could remain unchanged, the number of transactions had thinned out at a given point in time when the currency was most volatile.
?During a trading session, there are pockets where volumes dip and clients keep away. It can resume later,? said a currency dealer at a public sector bank. Meanwhile, rupee’s massive fall since April is expected to drive up headline inflation and make it complicated for RBI to respond to growth slowdown. Analysts estimate a 10% fall in rupee could drive up headline inflation by 60 bps.
