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Rupee may strengthen slowly
- Till August 2011 (calendar year) the rupee was quoting in the 44-45 range to the dollar. Thus, the fall in rupee value to above 52 was sharp and sudden.
- The markets suspect central bank intervention by pumping dollars (some say it was around $3 billion) into the market after the rupee hit an all time low of 52.73 intra-day on Tuesday.
- The increased uncertainty in the eurozone on account of the sovereign debt crisis has led to shifting of capital from Europe to the U.S. which has hardened the U.S. dollar against most currencies.
- Widening trade deficit, high inflation and eurozone debt issues have been attributed to the fall in rupee value against the dollar.
- Interestingly, there are various financial instruments which may end up in losses like foreign currency convertible bonds on the basis of mark-to-market (MTM) losses on account of exchange rate fluctuations. Further, the losses on account of derivatives products by hedging export revenues against a fixed rupee-dollar rate could be on a higher side.
- The RBI recently investigated the violation of the Foreign Exchange Management Act (FEMA) by several banks, the victims of these violations are importers and exporters as well as companies which sold forex derivative contracts resulting in the massive losses of Rs.25-lakh crore as per the rupee-dollar exchange rate of 46-47. These contracts were purchased at the time when the rupee was quoting at 37-38 a dollar.
- The central bank asked the corporates to bring in the proceeds of external commercial borrowings (ECBs) raised abroad for rupee expenditure in India.
- The RBI has announced a special window to sell U.S. dollar to government-owned oil importers.
- While oil payments to Iran in August 2011 and risk aversion acted as initial catalysts, the deterioration on the domestic macro front accompanied by lower inflows have resulted in a sustained fall in rupee value.
- Apart from a higher import bill, rupee depreciation is likely to complicate macro management. Inflation is likely to remain elevated as input costs across all components could see an increase.
- This would also be a drag on the fiscal situation as every Re. 1depreciation oil under-recoveries will increase by Rs.8,000 crore.
