Rama Krishna Vadlamudi, HYDERABAD 15 September 2011 www.ramakrishnavadlamudi.blogspot.

com

The Indian rupee has touched a two-year low against the US dollar. One dollar was fetching Rs 44.74 on 5 August of this year when Standard & Poors downgraded US credit rating by one notch. Now, after nearly six weeks, one US dollar is quoting at Rs 47.65 the closing price on 14 September recovering from an intra-day low of Rs 48.01. What this means is that dollar has become more expensive by around three rupees or 6.5 per cent. Considering that the dollar-rupee exchange rate was not very volatile in recent times, the steep depreciation of Indian rupee against US dollar is quite surprising.
What caused the rupee to fall against the dollar?

At present, there is dollar shortage in the market, not only in India but across the world. The dollar has started appreciating against the Euro, pound sterling and other major currencies in the past two weeks. Foreign Institutional Investors have sold $1.7 billion (Rs 7,670 crore) worth of equity investments in Indian stock market in the last six weeks. However, market experts say the Indian rupee is falling due to weak growth in India's national income, dollar buying by oil marketing companies for their oil import and technical factors. Foreign exchange traders may be resorting to arbitrage for short-term profits. The global uncertainities caused by sovereign debt crisis in the US and euro zone. Growing current account deficit (imports more than exports). More selling by FIIs in Indian stock market. It is difficult to tell whether or not RBI will intervene to buy or sell dollars in the forex market. Between July 2009 and July 2011, RBI's intervention in the market was practically nil. RBI resorted to buying and selling of US dollars heavily and routinely between Nov.2006 and June 2009. However, there are market rumours that the RBI had intervened in the market on 14 September to stop the rupee from falling beyond 48-level.

What factors may work against the rupee in the short-term? Whether RBI will intervene?

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RBI in public says the rupee value is determined by the forces of supply and demand. However, if the volatility is too much in the markets, they will definitely intervene. Sometimes, mere statements from RBI will do.
What is the impact of rupee fall on the markets?

Obviously, the biggest beneficiaries are exporters provided they have kept their positions open. However, importers are negatively affected as they have to pay more rupees for the same dollar when rupee falls or dollar goes up. In general, exporters and importers cover their positions through forward contracts and other derivatives. The stock prices of software majors, like, TCS, Infosys and HCL Technologies have gone up on 14 September. In 2007, rupee appreciated against the dollar up to 39-level which was not anticipated by Indian companies. These Indian companies suffered heavy losses of up to Rs 20,000 crore as they bought wrong types of hedging instruments from banks. Strong exports growth which are doing well of late. Indian Interest rates are higher than those in the US. Interest rates are rising in India while US stagnates. If some stability comes to the markets from euro zone. Financial markets always caught us unawares either on the upside or on the downside. When rupee is falling suddenly, everybody will try to buy dollars creating short-term aberrations. It will take some time for the markets to stabilize. Till then, we need to be watchful and expect the unexpected. Expectations about future interest rates and exchange rates play a major role in the markets. RBI is expected to raise Repo rate by 25 basis points (0.25%) during the 16 September meet.

2007 losses

What factors may support rupee in the medium term?

Whether rupee will touch 50-level?

References: SEBI and RBI Disclaimer: The authors views are personal. There is risk of loss in trading. Readers need to consult their financial advisor before taking any trading positions in the markets. For articles written by the author, do visit his blog:

http://www.ramakrishnavadlamudi.blogspot.com/

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