As the rupee plunged against dollar, the Finance Ministry sought to soothe the frayed nerves of trade and industry, stating that the local currency would stabilise in next 3-4 days on higher FII inflows.
“Certainly, we are not happy with it (rupee fall). But we are not unduly worried about it. I think this is a temporary phase and rupee will inch up. There will be a course correction,” Arvind Mayaram, Economic Affairs Secretary, told reporters here on Tuesday.
The rupee tumbled to close at a record low of Rs 58.15 to the dollar, falling more than 100 paise to the previous day’s close of Rs 57.06. This is the biggest daily loss in over 20 months. Rupee had hit a low of Rs 58.98 intra-day, but some foreign direct investment inflows and dollar selling by foreign banks is said to have saved the day for it. It has depreciated 6.7 per cent so far in the current fiscal and 5.5 per cent this calendar year. Since May 1 this year, the rupee had declined 7.5 per cent.
Mayaram said some foreign institutional investors (FIIs) are poised to invest large funds in the debt segment in India, which could help the rupee gain in the next few days.
The main reason being attributed for the sharp slide in rupee is the FIIs’ move to sell Indian debt in a big measure in the wake of US Federal Reserve’s remarks that it might curb its asset purchase in the coming days. FIIs net sold Indian debt worth $ 1.27 billion during June 1-7, compared with net purchase of shares of $227 million in same period, SEBI data showed. Raghuram Rajan, Chief Economic Advisor to the Finance Ministry, said the fundamentals for India were improving, even while many parts of the world were still stuck in recessionary conditions.
Debt outflows
He said the significant weakening of rupee was only partly due to debt outflows after the Fed’s remarks.
“I say partly, because despite the debt outflows, portfolio inflows between May 1 and June 10 have been significant. On net, India has received $4.162 billion in equity flows, and lost $486 million in debt outflows, for a net inflow of $ 3.675 billion”.
A large part (for rupee’s weakness) was due to dollar strength, he said.The other reason for rupee’s weakness is that typically the May current account deficit is larger because of seasonal factors.
And on top of that the increased gold purchases as gold prices dropped and I think we have the main reasons for rupee weakness, Rajan said.
MORE MEASURES
Rajan said that Government will continue to undertake measures to ensure the current account deficit is safely financed.
Measures to ease foreign investor portfolio inflows will continue to be implemented and some will be done very shortly, he added.