Rupee's plunge hits new record low of 53.75 against dollar
14 Dec 2011
The Indian rupee plunged to a record low of 53.75 against the US dollar in early trade on Wednesday, two days ahead of a crucial meeting by the Reserve Bank of India to review its rates policy. The currency, however, recovered slightly over the course of the day.
The rupee fell by 52 paise – almost one per cent – in the morning, after having breached the 53 a dollar-mark just a day earlier. While some analysts say that the currency has reached its bottom, others fear that it could plunge even further to 55 by the end of the year or even 57 in the first quarter of 2012.
The Indian currency has lost more than 18 per cent since July – and about 20 per cent in the current fiscal – as the economy has slowed down sharply and inflation has remained at stubbornly high levels. On Wednesday, the government revealed that wholesale prices rose 9.11 per cent in November (as against 9.73 per cent in October), the lowest rate in the last one year.
Analysts expect the RBI to keep the rates unchanged at its Friday meeting. The central bank has raised the lending rate 13 times since March 2010, and may opt to ease its tight monetary policy.
The rupee has been declining sharply in the wake of demand for US dollars from banks, importers (including the three major state-owned oil refiners), and continued outflow of capital, as foreign institutional investors continue to dump shares.
But nervous currency traders are worried that with about $20 billion of external debt payments due in the first half of 2012, the prospects of the rupee gaining are bleak.
The RBI has largely been maintaining a hands-off policy, intervening only occasionally to ease the situation. Though foreign exchange reserves are at a comfortable level of $306 billion, it barely covers India's external debt of $305 billion.
Most Indian corporates – both exporters and importers – have been caught napping with the sudden slide of the rupee in recent weeks. Most currency strategists and analysts had never planned for such a sharp depreciation – it has fallen by 3.5 per cent in the last one week – resulting in massive losses for traders and corporates.
