Rupee hits 3-week low, testing RBI's resolve to defend currency

Last Updated: Tue, Jul 30, 2013 12:25 hrs

The Indian rupee fell below the key psychological level of 60 to the dollar to a three-week low on Tuesday, posting its biggest fall in a month, as the central bank kept interest rates on hold and failed to announce any additional steps to defend the currency.

The rupee has now erased all gains since the Reserve Bank of India first announced steps to defend the rupee by withdrawing cash on July 15, and is within sight of a record low of 61.21 hit early this month.

Analysts said those actions alone were unlikely to prevent more falls in the currency unless followed by additional steps from the central bank or by measures from the government to attract foreign inflows.

Instead, the central bank said on Tuesday it may withdraw the cash tightening steps taken so far in a calibrated manner if the rupee stabilises, comments that led investors to doubt the RBI's resolve in sticking to its measures given surging bond yields threaten to raise borrowing costs.

"It seems slightly strange for the RBI to tell the market that it will unwind the liquidity tightening measures as and when the currency has stabilised," said Robert Prior-Wandesforde, economist at Credit Suisse, wrote in a note.

"After all, by indicating such an approach, it presumably makes it less likely that stability will actually be achieved!"

The partially convertible rupee closed at 60.47/48 per dollar compared with 59.415/425 on Monday. It fell 1.8 percent to 60.55 in the session, its lowest since July 8.

It fell 1.8 percent during the session, its biggest single day fall since June 26.

The rupee's woes were exacerbated by strong dollar demand by state-run banks on behalf of oil refiners and from the government, whose demand typically surges during month-end to make payments.

The government is contemplating measures of their own and will announce steps in the next few weeks to curb the current account deficit, chief economic adviser Raghuram Rajan said in New Delhi.

The current account deficit, which hit a record high of 4.8 percent of gross domestic product in the fiscal year ended in March, is a key source of stress for the rupee.

However, RBI Governor Duvvuri Subbarao made it clear on Tuesday he was opposed to a sovereign bond issuance, another option that could bring foreign inflows, although it would risk sending a signal of weakness to markets.

In the offshore non-deliverable forwards, the one-month contract was at 61.03 while the three-month was at 61.88.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 60.91 with a total traded volume of $3.2 billion.

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