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Heavy dollar demand from foreign institutional investors and oil companies saw the rupee breach the 52 mark to the dollar on Monday to close at a 32-month low of 52.16.
The rupee came under pressure as FIIs cut their positions in the domestic equity markets and converted the sale proceeds into dollars for repatriation to their home countries, ahead of year-end closing of accounts.
The bell-weather BSE Sensex closed 2.6 per cent (or 425 points) down at 15,946 on Monday, weighed down, among others, by fall in shares of ICICI Bank, Infosys, Reliance Industries Ltd, HDFC and HDFC Bank.
Risk-aversion is prompting FIIs to cut equity positions in Indian and other emerging market economies and invest in safe-haven US treasuries and gold, amidst Euro zone debt crisis and concerns over US deficit, said a dealer with a public sector bank.
The rupee opened weaker at 51.42 to the dollar, against Friday's close of 51.33. Intra-day, the rupee tested a low of 52.1950.
Though the RBI is believed to have pressed dollar sales through public sector banks to stem the depreciation of the rupee, the action did not have the desired impact. The rupee has been Asia's worst performing currency. It has weakened nearly 17 per cent against the U.S. dollar this financial year.
Comments by Mr R Gopalan, Secretary (Economic Affairs), Ministry of Finance, that the central bank's ability to intervene in the foreign exchange market is limited clouded the rupee's sentiment.
“Un-hedged forex positions were getting covered in the market. There was demand for dollars from FIIs, importers, and oil companies. However, there was no matching supply. Though the rupee came under tremendous pressure, the RBI intervention in the market was only token,” said a dealer with a mid-sized public sector bank.
A depreciating rupee has an adverse impact on India's oil import bill and hence inflation. The country imports almost 80 per cent of its crude oil requirements.
“We are importing inflation through the oil import route because of the depreciating rupee,” said an economist.
Profitability of Indian companies, which depend substantially on imported raw materials and have repayments of external commercial borrowings and foreign currency convertible bonds coming up, will come under pressure in the October-December quarter. This, in turn, could have a negative impact on tax collections, he added.
Technical charts show the rupee depreciating further to 53.50 to the dollar by next month-end, said a dealer.
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