Currency check: Where is rupee headed Vs dollar?

The rupee on Tuesday touched an all-time low of 52.73 to the dollar, and speculation is rife that it could slide further for two reasons. Given the strong demand for the dollar globally (because of the turmoil in the eurozone), the greenback is expected to climb further vis-à-vis most other currencies. Specifically to India, foreign institutional investors are in no hurry to invest in our equity market due to a combination of domestic and global concerns.
Thankfully, FIIs have not sold shares aggressively despite the weakness in both the rupee as well as equities. But should the rupee slide further for whatever reason, it could trigger a vicious circle wherein FIIs would start pulling out money from shares, which in turn would weaken the rupee, and in turn spark more selling from other foreign investors.


What is the possibility of more ugly surprises in store?
Experts are hesitant to call the next low for the rupee. However, a majority of them think the rupee would continue to drift lower for at least the next couple of months.
“There is no near term trigger to bring back foreign fund flow into India,” Pramit Brahmbhatt, CEO, Alpari India, told moneycontrol.com.
“With the holiday season around the corner, there is unlikely to be any big-bang purchase (of shares) by FIIs. Moreover, domestic factors like high inflation and rising crude price would put further pressure on the rupee,” he said.
Globally, investors are now looking to the safety of dollar-backed assets, because of the crisis in Europe. This, coupled with the domestic factors, has made a strong case for overseas investors to exit from the emerging economies like India. 
“Capital inflow is a major bottleneck here,” said Roy Paul, deputy general manager – foreign exchange, Federal Bank.
“The near term pressure is going to continue for some time. RBI intervention to stem rupee’s fall is limited as the regulator has only a reserve of around USD 320 billion to meet country’s import requirements for 6-8 months. The pressure may aggravate further due to higher domestic demand for dollars emanating out of FCCB repayments, due in 2012.”  
Indian companies had earlier raised foreign funds through foreign currency convertible bonds (FCCBs). Between now and December 2012, according to a report by Kotak Institutional Equities, FCCBs worth about $5.6 billion is due for redemption. This will add to dollar demand by domestic companies as the repayment has to be made in dollar terms.
The rupee has a good support at 52.80 to the dollar. If it breaks at that level, it would touch 53 per dollar. A strong RBI intervention, according to analysts, is required to stem rupee’s bleeding beyond the 53 mark.
However, the regulator which is gradually moving towards full rupee convertibility would do only indirect intervention. The mechanism is to instruct public sector banks to sell dollars.
“RBI’s efforts to cut the excessive one-way move have been futile. There is not a single factor to bring the rupee bull into street which was in total control till July 2011,” Moses Harding, head – ALCO and economic market research, IndusInd Bank said in a note.


The fundamentals and market dynamics continue to remain bearish Read more