The rupee closed below the crucial 57 to a dollar mark for the first time in almost a year on the back of weak global cues and heavy demand for the American currency from banks and oil importers.
The weakening of the rupee was accompanied with bad news on foreign exchange (forex) reserves front. India’s forex reserves declined by a massive $4.178 billion in the week ended May 31 to $288 billion.
On Friday, the Indian currency closed weaker at 57.06 against the previous close of 56.84.
Referring to foreign institutional investors selling their investments in debt and equity markets in the last one week or so, a dealer with a state-owned bank said: “It seems FIIs are not impressed by the measures the Government is taking to curb the current account deficit and revive investment sentiment.”
The recent steps taken by the central bank to restrict gold imports and upping the cap on foreign investment in government debt was not enough to support the domestic currency, he added. “The rupee has surpassed its key level of 57 against the US dollar. Although the euro was seen recovering above $1.32 and the dollar index sustaining below 82, the rupee continued with its losses,” said Abhishek Goenka, Founder and CEO, India Forex Advisors.
The Indian unit came under pressure after the RBI Governor observed that as long as the current account deficit remains the rupee will continue to be under pressure.
The Indian unit is seen nearing its all-time low recorded last June, when it touched 57.32/dollar and fuelled fears of more weakness.
A weak rupee has an inflationary impact on the Indian economy as it imports almost 80 per cent of its crude oil requirement.
Intraday, the rupee touched a low of 57.12 and a high of 56.69 against the dollar.
The rupee continues to face challenges from India’s rising current account deficit (CAD) and overseas economic data and policy decisions, said dealers.
Forex reserves
Since March-end 2013, the country’s forex reserves have declined by $4.148 billion. However, since the beginning of the calendar year, the reserves have nudged up $2 billion.
The objective of the RBI as the custodian and manager of the country’s forex is to, among other things, limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis; provide confidence to the markets that external obligations can always be met, thus reducing the overall costs at which forex resources are available to all the market participants; and maintain confidence in monetary and exchange rate policies.