Rupee ends flat at 55.64/$ on dollar demand, Euro
As growth slows and expectations of rate cuts rise, Aditya Puri, managing director of HDFC Bank, says that while some room for rate easing has opened up, any dramatic reduction in rates is unlikely.
The rupee ended flat on Tuesday at 55.64 against the dollar, just one paise higher than Monday’s close.
The Indian currency had opened higher at 55.39 to the dollar and went on to hit a week’s high of 55.27 to the dollar, tracking a slight revival in risk-taking in other Asian markets. However, it weakened in afternoon trade on the back of a sharp fall in the euro and dollar demand from oil firms.
The Euro, which had strengthened against the dollar earlier, weakened to 1.2450/$. It had risen as bear market players trimmed bets ahead of G7 emergency meeting on Europe crisis and hopes of stimulus hit demand for safe haven currencies such as the dollar.
Also Read: India Inc sees rupee falling to 58 to the dollar
The rupee had strengthened on Monday morning on the back of dollar sales by corporates and exporters, as well as unwinding of long-dollar positions by banks, and went on to touch a week’s high of 55.27. However, with the European markets opening lower, the rupee fell to 55.68/$. It ended partially weaker against dollar on Monday as global risk aversion hurt demand for risk assets such as the rupee leading to its fall.
The Indian currency had hit a string of record lows against the dollar in the second half of May, with the latest on Thursday when it fell to as low as 56.52. It has been the worst performing Asian currency this year, falling 6.35 per cent in the month of May, the biggest monthly fall in six months.
Traders say the Reserve Bank of India could intervene more aggressively, while perceptions the central bank could cut interest rates as early as this month may also contribute to a recovery in the rupee by helping boost a sagging economy.
"Participants are unwinding long dollar positions on expectations we have likely bottomed-out for now, though the external situation will be closely monitored for direction," said N S Venkatesh, treasurer at IDBI Bank.
Venkatesh said he expects the rupee to trade at 55.25-56.26 range for the week.
ROOM FOR RATE CUT
India's slower than expected growth rate will further complicate matters for the RBI, which is faced with growing calls for more rate cuts despite its continued concerns about inflationary pressures. It had delivered a 0.5 per cent cut in the repo rate last month, but analysts had expected the central bank from refraining to further lower India's main lending rate until later in the year.
Longer-term, analysts see more potential for rate cuts, with the 10-year benchmark bond yields hitting a 2-1/2 month low on Monday, as debt prices head for their third consecutive daily gains.
However, head of the central bank’s mid-quarterly policy review later this month, Reserve Bank of India deputy governor Subir Gokarn said there could be room for a rate cut because of slowing growth and cheaper oil.
“Two factors that suggest there is room for a rate cut is the slowdown in growth and the fall in oil prices,” Gokarn told NDTV Profit, adding that other factors indicated there was no room, and that the RBI would have to "balance these factors".
The one-month offshore non-deliverable forward contracts were quoted at 55.84 while the three-month was at 56.57, suggesting a weak near-term outlook.
RUPEE TO FALL FURTHER?
Meanwhile, Moody's said that significant depreciation of the Indian rupee is insignificant for India's sovereign credit. "Government foreign currency debt comprises only 7 per cent of total government debt and 5 per cent of GDP. Most of it is owed to multilateral and bilateral creditors and has a maturity profile that keeps annual foreign currency repayments relatively low. Therefore, the direct effect of depreciation on the government’s own debt repayment capacity is limited," Moody's said in a report.
According to Standard Chartered, Rupee may drag to 58.60 levels against the dollar on account of technical weakness. Morgan Stanley, however, expects rupee to cross levels of 60 and touch 62.70/$.
Moreover, the one-month offshore non-deliverable forward contracts were quoted at 55.84 while the three-month was at 56.57, suggesting a weak near-term outlook.
With inputs from Thomson Reuters