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BW Businessworld

Rupee Hits Record Low; RBI Steps In 'Mildly'

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The rupee fell to a record low against the dollar on Thursday, as the euro and other risk assets were hit by disappointment about the size of bond purchases announced by the Federal Reserve and by weak global economic data.

The Reserve Bank of India made what traders described as a "mild" attempt at defending the currency early in the session, and some traders said it may have acted again after the currency briefly surpassed the previous record low hit on May 31.

Just like in May, when the rupee tumbled to a string of record lows, renewed global risk aversion has been the spark for the falls in the rupee, but the decline has been sustained by the deep uncertainty about India's fiscal and economic outlooks.

"The RBI's intervention and policies to mitigate the weakness is not the silver bullet to what really is a structural weakness for the currency; i.e. the twin deficits," said Nizam Idris, head of Asian fixed income and currencies at Macquarie Bank.

Idris expects the rupee to gradually weaken to 57.5 to the dollar over the next month, though adds a sharp weakening will be prevented as importers and oil companies may have covered most of their hedging needs for the months ahead.

The rupee fell at one point to a record low of 56.55 to the dollar, surpassing its previous 56.52 low.

However, the local currency recovered losses on the back of rallying domestic equities to settle at 56.30/31 versus its 56.15/16 close on Wednesday.

Global markets weakened on Thursday after the Fed extended its current bond-buying programme by less than some investors had hoped, while weak factory data from China and a contraction in the euro zone's private sector contributed to the falls.

The rupee will remain vulnerable to any flare-ups of global risk aversion, while also subject to domestic challenges.

The one-month offshore non-deliverable forward contracts closed at 56.71 while the three-month closed at 57.46, implying further losses ahead.

The RBI disappointed domestic markets by keeping interest rates on hold on Monday, the same day when Fitch Ratings cut the country's outlook to "negative", becoming the second credit agency to threaten India's investment grade rating.

Fitch and S&P have highlighted the growing unease from investors about the lack of visible reform moves by the government despite a toxic macroeconomic cocktail of slowing growth and high inflation.

The focus has shifted to the government, which faces a daunting task of reviving faltering economic growth while ensuring its current account and budget deficits do not widen any further.

Reserve Bank of India Governor Duvvuri Subbarao this week said the central bank will continue to intervene in the currency markets to curb volatility, blaming the rupee's falls on both global and domestic factors.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 56.4225 on a total volume of $5.6 billion.