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Rupee slide: Will it become a senior citizen soon?
22 Jun 2012 09:07 PM
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Saikat Das

Moneycontrol.com

Well, the market is clearly divided on this. The Indian rupee on Friday touched a record low at 57.32 against a US dollar before closing at 57.12. This has again broached a debate over rupee sliding to 60, the age bar to become a senior citizen.

A section of currency experts believe that unless the prevailing negative sentiment turns positive, the freefall will continue. In May, IndusInd Bank's Moses Harding (head of ALCO & economic research) predicted a range of 59.75-60.00 on the back of weak fundamentals and strong USD against major global currencies.

However, State Bank of India's Dr Brinda Jagirdar, general manger (Economic Research) believes, the tumultuous dollar-rupee phenomenon is temporary in nature.

"It does not warrant any movement to 60. It is the skittishness that is getting reflected in the market. Currently, the market is fraught with so many uncertainties. Due to Euro zone crisis, global risk aversion stays dominant in investing sentiment. In such a situation, nobody will lend money to emerging countries," she told Moneycontrol.com.

Owing to the lingering economic crisis in European zone, investors across the world are seeking safety of US dollar backed assets. Accordingly, all major currencies including Euro, Great British Pound (GBP) and others are depreciating against the US greenback. Rupee does not remain insulated and USD too is strengthening against the Indian currency. Since January, rupee fell by 6.4% against USD in 2012. In the last one year, it tumbled by 24%.

Other factors behind INR's sharp decline..

"Presently, a lot of miss-matches are adding to rupee's sharp depreciation," said Pawan Bajaj, general manager, Bank of India.

"A good amount of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) are maturing. Moreover, exports are slowing due to global crisis. All these lead to higher demand for dollar buying. Unless economic reforms start happening, the negative sentiment will continue to climb. In the near future, rupee would not fall below 50."

In absence of reformist measures by the government, foreign investors are shying away from Indian markets, which in turn, squeeze dollar inflows into the country. In FY13 so far; foreign institutional investors (FIIs) have net sold around Rs 2,986 crore in Indian equities.

According to an estimate by Edelwiss brokerage, India Inc. is likely to see an outflow of Rs 24,500 crore on account of redemption of the bonds in FY13.

Meanwhile, the crude oil prices have come down. It has dropped below USD 90 a barrel for the first time since December, 2010. However, rupees depreciation has erased gains keeping imports costlier. Hence, the yawning current account deficit continues to hurt the economy impacting foreign exchange rate.

"It looks like that Rupee would touch Rs 60. Fewer dollar inflows, higher rate of inflation and global risk aversion are making a case for further rupee fall. It seems, rupee is heading to a new normal level," said Hariprasad M P, head treasury, CentrumDirect, a Mumbai based brokerage.

Exchange rate: India vs. other SAARC nations

The dollar exchange rates of other members of South Asian Association For Regional Cooperation (SAARC) are much lower than the Indian rupee. In Sri Lankan rupee is at around 132.68/US$, Pakistani rupee at 93.35/US$, Nepalese rupee at 84/US$ and Bangladeshi taka at 80.43/US$.

"We have not reached a situation where we will conclude that 55 or 60 is the new normal level. Indias economy is farahead of other SAARC nations. Once fundamentals are back on track, rupee can bounce back to 45-48 level in a years time," said a senior manager (currency) from a private sector bank.

saikat.das@network18online.com

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