As rupee nudges 69, RBI will sell dollar directly to oil PSUs

The rupee fell by a record 264 paise against the dollar to close at 68.83 on Wednesday as the likelihood of a US-led strike against Syria increased, sending crude prices soaring. The Reserve Bank of India responded to the fall by announcing a move to provide dollars from its reserves to meet import needs of oil companies which account for nearly 40% of demand for dollars in a normal month.

The free-fall of the rupee resulted in a surge in demand for gold, which saw its biggest-ever single day surge of Rs 2,500 to hit Rs 34,500 per 10 gram. The sensex, which at one point was down 533 points, recovered sharply to close 28 points higher at 17,996 after LIC stepped in to buy shares in a big way.

The RBI's move to sell dollars directly to public sector oil companies — IndianOil, HPCL and BPCL — has resulted in the rupee firming up in the offshore forward market. Dealers said that the RBI appears to have waited for the rupee to get into an oversold position before coming out with its measures.

This could result in a sharp appreciation when markets open on Thursday. Compared to Tuesday's close of 66.19 the currency opened at 66.9 on Wednesday morning and immediately fell beyond 67 levels. Dealers said that the reason for the bearishness was the surge in crude oil prices coupled with statements from the US that defence forces were ready to strike Syria for its use of chemical weapons against political dissidents. Although most emerging market currencies have fallen against the dollar, the rupee is the worst performer by far having dropped by nearly 4%—its biggest single-day fall. Syria's neighbour Turkey, which is facing problems similar to India, fell by a more modest 1.6%.

"The pace and extent of the fall on Wednesday shows that there may have been some interest in depreciating the currency. It is possible that some banks with options could have triggered the fall," said K N Dey a forex consultant who advises business. According to Dey, there is a strong element of speculation in the recent fall. "Why should the rupee be compared to the Turkish lira, why can't it be compared to the Bangladesh taka which has appreciated by 3.2% this year?" said Dey. Although India has a large current account deficit, unlike Bangladesh, bankers say that this reflects a long-term trade position and cannot be explained as the reason for a sharp fall in the last three days. The rupee, which was trading at 44.5 levels a little over two years ago at the time of the US downgrade by Standard & Poors in August 2011, has fallen by 53.8% in little over two years.

The only corporate demand for the dollar is from those companies which have foreign exchange loans that are coming up for repayment. Bankers said that there were indications that Wednesday's fall was not triggered by demand. There was a gap opening in the currency. There has been a sharp drop in volumes and foreign exchange market have turned extremely illiquid with importers putting decisions on hold and exporters fearing to encash their dollars—a situation which dealers say is a speculator's paradise.

In the central bank the immediate suspicion is the non-deliverable forward market. The NDF market is an unofficial rupee market since no rupees are actually bought or sold. What happens is that banks enter into a deal to buy and sell rupees on the future date but when the due date comes they settle the trade in dollars.

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