Rupee breaches 72 mark against dollar for the first time; RBI intervenes

Illustration by Ajay Mohanty
The rupee crossed the 72-a-dollar mark on Thursday, but retreated on intervention by the Reserve Bank of India (RBI). 

The currency fell to 72.07 a dollar in intra-day trade, but closed just below the 72-mark. Many economists who were critical of the RBI not intervening were coming out in support of the central bank’s hands-off approach, in view of the volatility in other emerging markets (EMs). 

Finance Minister Arun Jaitley said on Wednesday there was no need for a knee-jerk reaction because of the rupee movement. 

“The rupee is moving because of global factors,” Jaitley said in an interaction with the media. Except the dollar, the rupee has strengthened or remained in a range against all other currencies, he said. 

“Eventually, the inherent strength of the Indian economy has to play a very important role. The RBI is doing whatever is necessary to deal with the situation. I don’t think there’s any need for the world’s fastest-growing economy to react adversely,” Jaitley said.

Experts reacted to the rupee movement and the FM’s statements on Thursday.

“Statements from the FM indicate the government is comfortable with a gradual depreciation and we can expect some intervention, which will only stem a sudden fall but not a reversal. We expect the rupee to trade between 71.80 and 72.50,” said Salil Datar, chief executive officer of Essel Finance VKC Forex.

Currency dealers said the RBI had been intervening since Wednesday as rupee depreciation continued unabated. 

“There is heavy dollar demand, but the RBI has started intervening,” said a senior currency dealer with a foreign bank.

But the rupee is not alone in the loss.

Other EMs are also witnessing a rout against the dollar, as the greenback continues to strengthen against major currencies worldwide. This is reflected in the dollar index, which was at 95, rising more than 3.3 per cent year to date. 

Even as the rupee is by no means the world’s worst-performing currency, it is the worst in Asia, closely followed by Indonesia. Both countries run current account deficits, and are largely dependent on portfolio flows to finance their deficits. 

In case of India, portfolio flows were marginally positive in August, but had witnessed more than a $3-billion outflow in the April-June quarter. Investors are again liquidating their India investment and that is putting pressure on the rupee.

According to Soumyakanti Ghosh, group chief economic advisor of the State Bank of India group, the rupee’s loss was because of the dollar, but there could be more losses.

“The current depreciation was long overdue and trends in NDF (non-deliverable forwards) market (rupee at 75 and implied one-year yield at 7.7 per cent) suggest the pain might not be over yet,” Ghosh wrote in a report.

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