Rupee hits record low of 55 to the dollar: Top 10 developments

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The Indian rupee slumped to 55 against US dollar, the lowest level ever touched. The currency has shed over 10 per cent of the value since March 2012 and over 20 per cent over the past one year and is among the weakest currencies in Asia.
Here are top ten developments:
1. The Indian rupee fell to the lowest level in the history at 55.03. This was its fourth consecutive record low in as many sessions, as the euro retreated from the day's highs and as global risk sentiment remained weak. Traders said corporate dollar demand and oil and defence-related dollar buying also weighed on the currency.

2. Finance minister Pranab Mukherjee expressed concern on Sunday about the steep fall in the value of the rupee and said that the government was not sitting idle.

3. The Indian rupee is one of the weakest currencies in Asia and among emerging markets. This is largely because India is a net importer of goods and services and hence has a high current account deficit. In comparison, other Asian economies like Singapore, South Korea, Taiwan and Malaysia are net exporters and maintain a current account surplus. A current account deficit occurs when a country imports more goods and services than exports.

4. The Reserve Bank of India's recent fight to defend the rupee has had muted success, with the currency hitting a record closing low on Monday despite several administrative measures as well as selling of dollars in the market by the central bank. The rupee has lost nearly 10 per cent in value since the start of March and is expected to remain under pressure amid global risk aversion and worry about India's large current account and fiscal deficits and sluggish policymaking by the government.

5. The RBI could open a dollar window for oil companies to sell rupees and buy dollars from the central bank. This would reduce volatility in the rupee by enabling oil companies to directly source a large part of their dollar requirement instead of buying large chunks from the market. The RBI could sell the dollars to oil importers at its daily reference rate. However, that could severely strain India's reserves given the country's large oil import bill.

6. The RBI could conduct special market operations for oil companies, holding auctions to buy oil bonds and giving the oil companies foreign exchange at market rates. However, dealers say the outstanding amount of oil bonds is too small to lead to significant rise in dollar supply. The RBI opened such a dollar window for oil companies in 2008 and discontinued it in 2009.

7. The government could issue a sovereign-guaranteed bond through State Bank of India to non-resident Indians at attractive interest rates, similar to the Indian Millennium Deposits issued in 2000, when the bank attracted around $7 billion for a $5 billion issue. However, such a move could increase the country's debt and interest liability.

8. India could issue sovereign bonds to raise dollars from overseas investors. However, the RBI is wary of the government issuing bonds directly as it exposes the country to foreign exchange risk during repayment. One option would be to sell a dollar bond repayable in rupees. The Philippines was the first country in Asia to sell dollar bonds abroad to be repaid in its local currency in September 2010.

9. The RBI can attempt to persuade banks and finance companies to raise funds in dollars abroad and bring them back to India to lend locally. Many banks have an ongoing forex bond issue programme, and the rupee's decline can make it attractive to raise dollars and convert them into rupees even after accounting for the hedging cost given the fall in forward dollar rates.

10. The central bank could issue rules to effect a delay in import payments, which typically are made at the end of every month. The bunched-up outflows put pressure on the rupee, and the RBI could look at asking for staggered payments.

Source: NDTV Finance

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