The rupee sank further on Thursday as the easing of external commercial borrowing (ECB) norms by the RBI late on Wednesday night failed to instil any strength on the currency. It closed weaker at 49.82 against the dollar, touching another historic low, amid fears that a global recession may lead to further pullout by foreign institutional investors (FIIs) to meet redemption pressures back home.

The rupee fell close to one per cent from the previous day’s close of 49.30 to a dollar. It touched an intra-day high of 49.85, when the RBI stepped in and strongly defended the local currency. According to forex dealers, the RBI sold close to $1 billion to defend the currency. At these levels, the rupee lost nearly 21 per cent this year. The macro-economic survey released by the RBI on Thrusday states that “dollar’s strength from early August 2008 reflected the narrowing of growth differential between the US and the rest of the world, liqudation of positions in overseas equity and bond markets by US investors and repatriation of money back to the US due to slowing growth in the Euro zone.”

Dr Saumitra Chaudhuri, member of PM’s Economic Advisory Council and Economic Advisor of ICRA, said the overall economic conditions suggest that the rupee might weaken further. “That (the weakening rupee) seems to be the direction,” Chaudhuri told Financial Chronicle.

He felt the overall economic scenario remains adverse. “The conditions remain adverse. Unless the conditions change, there is unlikely to be a change in direction,” he said.

PNB chief general manager Arun Kaul said the reason for the steady decline of the rupee is principally the demand for dollars due to heavy selling by FIIs, while supply of dollars has almost dried up. “There is very strong demand for dollars from FIIs,” Kaul said. He added that both the trade balance remains negative along with negative capital flows. “The ECB window has been opened a bit, but still the flows are not large,” he said.

Asked where the rupee could be heading for, Kaul said: “It is very difficult to say where the rupee is heading for, but the trend is unlikely to be reversed till the demand for dollars remains high,” he said.

Harihar Krishnamurthy, treasury head of Development Credit Bank, agrees with Kaul that the rupee would be under continued pressure. “The rupee continues to be weak, partly due to the strengthening of the dollar overseas and a strong domestic demand from importers and FIIs. The widening trade deficit and the steady pullout by FIIs are the biggest pressure on the local currency. The rupee is moving in tandem with most Asian currencies.”

N S Venkatesh, MD and CEO of IDBI Gilts, said the pressure on the rupee would continue. “Global pressure is mounting on the rupee. The fact that FIIs have pulled out $11.9 billion since January till date has dealt a blow to the local unit.”

“The stock markets were in the red all across and that was a dominating factor for rupee weakness. The measures announced would not result in immediate flows and in the short run. It is the stock market behaviour and the resultant inflows/outflows, oil firms’ and other importer buying - that will be key to the rupee direction,” says Gurumurthy RK , head of trading & ALM at ING Vysya.

Forex dealers say, “One needs to keep in mind that the measures announced by the RBI on easing of ECB norms and its possible positive impact on the rupee will start showing only in the weeks ahead.” The one-month offshore non-deliverable forward contract (PNDF) was quoting at Rs 51.45 to a dollar, much weaker than the onshore spot trade, opening up for arbitrage possibilities. But the arbitrage window was not active.