rediff.com: Rupee sinks to all-time low of 45.35/$

The Indian rupee slid to a new low on Wednesday as the market, emboldened by the central bank's refusal to be rushed into fresh support measures, made more heavy dollar purchases.

The rupee closed at 45.35 per dollar, weakening from Tuesday's close of 45.15/16 and extending the year's losses to 4 per cent -- a quite modest rate of decline compared with other currencies.

Reserve Bank of India Governor Bimal Jalan said, after meeting with Finance Minister Yashwant Sinha on Tuesday, he was confident and would not be hurried into any further action.

The market had expected the RBI at least to offer stronger verbal support if not actual fresh measures to reinforce the liquidity squeeze and interest rate defence erected almost two weeks ago.

Dealers expect the central bank to squeeze liquidity harder through its daily government securities repurchase (repo) and reverse repo auctions.

The rupee's weakness reflects a general deterioration in its balance of payments position, which showed a $6.4 billion surplus last year, due to high global oil prices and the import demands of a faster growing manufacturing sector.

The RBI has shown a reluctance to run down its foreign exchange reserves to defend the currency.

The long-term answer to the rupee's weakness must be to find ways of inducing more foreign capital inflows through economic reforms.

The pressure on the rupee on Wednesday stemmed from dollar buying by several state-owned firms, and foreign funds exiting the stock market, while several exporters cancelled earlier dollar sales, betting on the rupee weakening further.

Some traders predicted levels of 46 for the rupee in the near future, and said a breach of 45.50 could cause panic.

One currency analyst for a major US investment house believed the RBI would certainly act if the rupee hit 45.50.

After the rate hikes and liquidity tightening measures on July 21, which gave the rupee a short-lived breather, there were very few options left for the central bank, analysts said.

The RBI hiked banks' cash reserve ratio by 50 basis points to 8.5 per cent in two stages, and the bank rate by one percentage point to 8 per cent. It also halved banks' refinance limits.

Analysts said the rate hikes were also aimed at restoring interest differentials with the United States, where rates have risen 1.75 per cent in a year.

The rate hikes failed to have the desired impact, but the central bank could further tighten the short-term availability of funds by draining more through its repo auctions or stepping up bond sales, analysts said.

"The current demand is genuine importer demand, so rate hikes unaccompanied by tighter short-term liquidity will not reverse those genuine flows," Dominic Price, head of J P Morgan in India, said.

The impact of such short-term tightening may be marginal. Dollar demand is non-speculative and banks are wary of holding large positions.

Options other than hiking the daily repo rate include getting exporters to convert all holdings in their special export earners' accounts or raising money through another overseas sovereign-guaranteed bond, like the Resurgent India Bonds, Morgan Guaranty Trust Company said in a market commentary.

The Resurgent Bonds raised $4.2 billion from expatriate Indians in 1998, when the country's balance of payments was pressured by capital outflows after the US imposed sanctions against India for conducting nuclear tests.

Analysts said the central bank may allow the rupee to depreciate until all demand for dollars is met and then step in.

But that could mean a long spell of weakness for the rupee, given the declining foreign flows and delicate trade balance.

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Rupee slips to new low of 45.35/$