The rupee has sunk to its life-time low on Wednesday. The local currency closed at Rs 50.02 to a dollar, nearly 47 paise lower than Tuesday’s close of 49.65.
The falling rupee is the biggest casualty that the Indian economy is facing today due to the large amount of foreign debt that both the Indian government and companies have in overseas markets.
Shilpa Kumar, ICICI Bank’s head of treasury, said: “Rupee is mirroring a worldwide trend of the dollar strengthening against major currencies. The outflow of foreign institutional investors (FIIs) money is creating a dollar crunch that is sliding the value of the local currency. In the medium to long term, the volatility on the rupee will continue until the financial stability returns into the economy.”
“There has been an all-round buying – even by major PSU banks. The biggest move was primarily due to one large PSU bank buying late in the day. Presumably on the back of some customer demand,” said a forex dealer.
According to bankers, the falling currency is the biggest challenge that the Reserve Bank is trying to address. If the local currency falls in value there would be an increase in the asset-liability mismatches that Indian banks with foreign presence are already facing.
Most of the banks had borrowed short-term funds to fund long-term requirements. Foreign banks are no longer standing as guarantors nor is it possible to rollover credit in the global markets, leading to fund crunch in the overseas markets. Repayments of all these debts is expected to push up the demand for the dollar.
“The trade deficit is widening, the foreign institutional investors are pulling out money but then contraction in oil prices to $55 a barrel from $145 a month ago will dip the demand for the dollar. Foreign loan repayments of companies will also create additional demand for the dollar,” said Harihar Krishnamurthty, head of treasury Development Credit Bank.
Over the last one month RBI has released nearly Rs 2,70,000 crore into the system through the banks have to maintain with the RBI (CRR) and SLR cuts. But each time the rupee falls, RBI has to intervene to sell dollars, which resulting in sucking out an equivalent amount of rupee liquidity in the system.