India Re dives to lifetime low of 52.73

Oil Cos Stack Up Dollar, RBI & Govt Indicate Inability To Prop Up Rupee

New Delhi/Mumbai: The rupee continued its free fall and touched a nadir of 52.73 against the dollar, before recovering a little to close at 52.32, amid indications from RBI and the government that there was little that authorities could do to prop up the currency. 
    The Indian currency closed 16 paise lower compared to Tuesday's close which was a record low. The steep fall on Monday morning trade was due to heavy dollar demand from oil companies. Expectations of a further decline are also prompting importers to buy dollars, dealers said. There are clear indications from the market that the falling trend is going to last for a while. In the offshore market, three-month forward contracts traded at 53.46 to the dollar, compared with 53.05 on Monday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars. 
    Even in the futures market, which is used by companies tohedge their currency risks against a steep appreciation or depreciation, traders were betting on the rupee trading at 52.80 in late January. The rupee is among the most depreciated currencies this year, having lost close to 15% in 2011, and is the worst performer among the 10 most-traded currencies in Asia. 
    "The present situation is worse than the 2008 crisis which was essentially a problem faced by corporates. This time it is countries that are at risk which is a more serious problem. There is complete negativity on all fronts and it is not possible to forecast how low it can fall," said K N Dey, director at Basix Forex. Although RBI described the continuous slide as "disruptive", it indicated that there waslittle it could do. "We expect that a reverse adjustment (in the rupee) will take place when the European situation resolves itself," governor D Subbarao told reporters in Hyderabad. 
    Finance minister Pranab Mukherjee was blunt, and said, "RBI intervention may not help." RBI typically steps in through public sector banks such as SBI to either sell or buydollars and check extreme volatility in the currency. Typically, in a situation like this, the central bank would sell dollars. But fearing that its actions could suck out Indian currency from the system and put further pressure on interest rates, the central bank has been selling the greenback in small lots. But that has not helped. "Our policy is that if the macro-economic situation is impacted due to the exchange rate fluctuation or undue volatility, we will have to
intervene. We are yet to decide whether to intervene or not at the moment," Subbarao said. 
    The fall in the currency has sparked fresh pessimism in the market and even Mukherjee recognized that inflation management efforts would be hit. "As a result (of depreciation) whatever little benefit could have been derived from the softening of international commodity prices, has been wiped out," the FM said. 
WHAT POLICYMAKERS SAY RBI reserves firepower for the worst Subbarao Says Rupee Will Firm Only After Europe Resolves Its Problems 
Mumbai: One aspect of the rupee's sharp fall last week that has surprised markets is the Reserve Bank of India's muted response during the week. Dealers feel that the central bank is reserving its firepower as the global situation could worsen. 
    On Tuesday, RBI governor D Subbarao told newspersons in Bangalore that the rupee would firm only after Europe resolves its problems. "We expect the reverse adjustment will take place when the European situation resolves itself. Until then, obviously, I can't comment whether RBI is intervening or not but we are watching the market," he said. 
    Dealers feel that although the central bank is sitting on forex reserves of over $300 billlon they are not free reserves as they represents liability towards portfolio investors. "Last time when the rupee had crossed 50 the sensex had dropped below 8,500. This time the sensex is at 16,000, if the central bank were to support the rupee at this level it may encourage portfolio investors to further book profits," said a dealer. 
    According to Subbarao, the central bank will intervene when it is consistent with RBI's policy. "Our policy remains the same, which is to manage volatility in exchange rate and to ensure that exchange-rate volatility does not impair macroeconomic stability." 
    Subbarao's stance was reiterated by deputy governor Subir Gokaran in Mumbai. Speaking to reporters, Gokarn said that RBI did not have any target for the rupee but any action by the central bank must factor medium-term risks. He added that RBI was weighing possible actions on the rupee. 
    Subbarao said the proposed legislation on food security may result in pushing up prices. The governor also said that higher income was driving an increase in protein consumption adding to demand pressures. 
    Delivering a speech at the Indian Society of Agricultural Marketing in Hyderabad, Subbarao said: "The National Food Security Bill, 2011 is another potential source of pressure on inflation, and its inflationary impact will depend on the extent to which it will raise demand for food grains relative to the normal increase in supply." The proposed bill targets two categories of households—priority households and general households—which covers 75% of rural population and 50% of the urban population. The price restrictions are quite exacting and failure by the government to meet the obligations entails payment of a food security allowance to the beneficiary. "Estimates suggest that 68% of the country's 1.2 billion population will get a legal entitlement for food grains after the bill is enacted, significantly raising the annual grain procurement demand even as the available marketed surplus would not increase correspondingly.

RBI is monitoring the situation closely and will take the required action in light of the international developments as situation unfolds. However, RBI intervention (in the forex market) will not help Pranab Mukherjee | FINANCE MINISTER

Our policy is that if the 
macro-economic situation 
is impacted due to the 
exchange rate fluctuation or undue volatility, we will have to intervene. We are yet to decide whether to intervene or not at the moment. The intervention in the forex market will be in accordance with the RBI's policy. But in real terms I cannot tell (when the central bank will intervene) 
D Subbarao | RBI GOVERNOR

We should not overreact to movements in the exchange rate. But, also understand that there are good reasons for what is happening. 
Expectations of economic events in certain parts of the developed world together with asset preferences are driving investors into taking decisions, which affect not only exchange rates but the prices of commodities 
Rahul Khullar | COMMERCE SECRETARY