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Reserve Bank of India

RBI action halts rupee's free fall

It was yet another tough fortnight for the rupee, with the currency hitting new ‘all-time lows' in many trading sessions. Except in the fag end when rearguard action by the RBI shored it up smartly, the INR lost heavily against the US dollar through the period. It finally closed at 52.75 to the dollar, a decline of 2.9 per cent over the fortnight.

BI props

But for the announcements by the central bank late last week to curb currency speculation, the INR may have lost in excess of 4.5 per cent against the USD. Measures such as withdrawal of facility to cancel and rebook forward contracts, reduction of overnight open position limits of banks, and reduction of importers' limits to hedge currency risks provided support to the rupee. Also, the announcement of deregulation of interest rates on NRE deposits and NRO accounts to encourage dollar inflows helped sentiment. Besides, RBI's ‘pause' on interest rate hikes to aid flagging growth in the economy seems to have helped the rupee.

Economic woes drag

However, much damage had been done by then. At one point last week, the rupee even breached the 54-mark in intra-day trading. Multiple concerns on the domestic economic front contributed to the pain. Among these was the widening current account deficit (November exports grew just 3.7 per cent year-on-year while imports rose 36.3 per cent) and disappointing industrial production growth (dip of 5.1 per cent in October). Besides, there were fears of continuing policy paralysis on the economic front (FDI in retail was held back), and inflation continued to be high (9.11 per cent) even if it had somewhat moderated. It also did not help that the bourses lost heavily (down 8 per cent) over the fortnight and FII outflows ($166 million) continued.

On the international front, worries about the debt crisis in Europe continued. This was fuelled, among other developments, by disappointment over the outcome of the important EU summit, and a ratings cut of three major French banks. This added to the Euro's weakness and the USD's strength against many currencies including the Rupee. Over the fortnight, the Euro dipped below the crucial 1.30 level per dollar, and finally closed 2.6 per cent lower at 1.305. The rupee also ended stronger (0.5 per cent) against the euro which now yields Rs 68.69 compared with Rs 69.05 a fortnight back.

The coming weeks could see the rupee take support from the RBI's recent moves to shore it up. However, concerns about the domestic and international economy could translate into the dollar continuing as a safe haven for investors. This may restrict the rupee's gains.

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