Rupee falls on importer demand, CB action

*Another interest rate hike: Currency dealers divided



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The rupee fell to a new low yesterday closing at Rs. 123.60/80 against the dollar fuelled by importer demand and Central Bank prescriptions, currency dealers and market analysts said.


The rupee opened the day at Rs. 122.0/20 against the greenback and continued to slide to a recent low as importers scrambled to book their deals ahead of the festive season next month.


"The Central Bank has also contained dollar liquidity in the market by recently imposing limits on forward bookings, which is not helping the exchange rate. At the same time, the Central Bank has been pumping in rupee liquidity into the system which has continued to fuel import demand to an extent," a currency dealer said.


The banking system is facing a rupee liquidity crunch and the Central Bank has from the beginning of this month pumped in more than Rs. 63 billion via the reverse repurchase window with a further Rs. 35 billion being pumped in via cash auctions to help banks with liquidity constraints and this also keeping interest rates from moving up too high.


Monetary policy rates were increased by 50 basis points and an 18 percent cap on credit growth was imposed by the Central Bank last month to contain credit growth which was meant to bring down importer demand. However, by pumping rupee liquidity, the Central Bank is still making credit available at lower rates and this in turn is feeding into importer demand, currency dealers said.


They said banks still found it profitable to borrow at 9 percent from the Central Bank and lend at around 13 to 15 percent to importers looking to book their dollars with these rupees as early as possible, speculating a further depreciation of the rupee next month.


As reported in numerous occasions in The Island Financial Review, the liquidity crunch faced by the banking sector was for the most part caused by the Central Bank selling dollars (more than US$ 3 billion since July 2011) to keep the exchange rate stable during the latter half of 2011. When rupees were drained this way, the Central Bank pumped in rupees (printed, more than Rs. 300 billion since August 2011), to keep off pressure on interest rates. We had artificially low interest rates and an artificially strong exchange rate.


With the Central Bank expected to announce its monetary policy stance today, currency dealers are divided as to what to expect. Some say interest rates could be increased (by 50 basis points at the most) in order to once and for all put the brakes on excessive import demand and some said the Central Bank was likely to keep interest rates stable.


"The biggest problem in the market is the lack of direction. After intervening for so many years the Central Bank made a sudden u-turn instead of weaning the market from its interventionist policies. Credibility has been lost," a currency dealer said.


Meanwhile, according to a survey carried out by Reuters of 17 analysts, the Central Bank is expected to raise its repurchase and reverse repurchase rates by 50 basis points for a second month to 8.00 percent and 9.50 percent respectively to their highest level in more than two years.


 
 
 
 
 
 
 
 
 
 
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