Tuesday, September 30

Why is Rupee depreciating then?

The US Economy is weakening, why is Rupee depreciating (as compared to dollar) then?

The rupee slumped to a five-year low of 47.10 in spite of the slowdown in the US Economy. Ideally when a country is in the slowdown the currency of that country should depreciate. Fine that India is slowing down too but is still growing at a rate more than the US. But why is the Rupee depreciating then.

There is heavy dollar-demand from oil refiners and importers.
Sentiment for the local currency was further dampened by losses on the stock markets on Monday (29-Sep-08). But the central bank intervened by selling up to $1 billion which helped prop up the rupee.
We have the inflation climbing the ladder very fast with remote signs of coming down. The crude oil prices are extremely volatile. The GDP forecast is also trimmed every now and then. The current account deficit is widening.

With not many positives in sight, traders see the rupee trading in the 47-per dollar range for the next few days. At the current levels, the rupee is still the second worst performing major Asian currency against the US dollar as it has dipped by 18% since January after the South Korean Won which dipped by about 23% in the same period. Though many other competing Asian currencies, like the Malaysian Ringgit and Thai Baht, have also depreciated against the dollar, they have still fared better than the rupee while the Chinese yuan has actually strengthened against the dollar.
The central bank is not protecting any level as such. It is just protecting the market from excess volatility. At the moment, there are a number of underlying negatives, with constant dollar-outflows from the markets and a widening current account deficit. Given that the central bank is not proactively supporting any particular level, traders are not ruling out possibilities of the rupee depreciating beyond the 47-mark in the next few weeks either.
In the domestic market, the rupee touched a low of 47.10/11 against the dollar during early trade on Monday, a level last seen in June 2003. However, its slide was halted by heavy central-bank intervention, following which the rupee ended the day at 46.96/98 levels against the dollar, weakening from its previous close of 46.54/55. Cash conditions also went through a major squeeze, with banks collectively borrowing a record Rs 90,075 crore from the central bank, over both its daily liquidity adjustment windows.
RBI has been intervening heavily in the forex markets for the past couple of weeks, with nationalised banks selling dollars on its behalf. The RBI is estimated to have sold up to $2 billion in its intervention on Monday, in an attempt to shield the rupee from a steep fall. Also, dollar demand was enhanced on Monday, since the currency and bond markets will be shut on Tuesday for the half-yearly book-closing of banks.

Yield on the 10-year benchmark bond, the 8.24% bond maturing in 2018, rose to a high of 8.73% during early trade. It finally ended the day at 8.62%, three basis points above Friday’s close of 8.59%. According to a dealer with a private bank, some banks picked up positions in the 10-year bond, in an attempt to artificially bring the yield down, so that they wouldn’t incur mark-to-market losses in their half-year closing.
[Remember, yield is inversely related to the price; so when the yield comes down, the prices go up and thus the mark-to-market losses come down] Inter-bank call rates also remained high and touched a high of 16% during the day.
I am not really sure if I have answered the question myself that why is rupee depreciating as compared to the dollar. But yes, there are enough reasons for the rupee to depreciate.

Any better answers? Please post !!

source: extracts from The Economic Times (30-sep-08)

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