Wednesday, August 28, 2013

Rupee hits historic low of 68.82 against dollar, Sensex crashes 473 points - Hindustan Times

The rupee slumped past the 68 per dollar mark on Wednesday, hitting a record low of 68.82, as concerns weighed heavily in the financial markets on the expected increase in government's subsidy burden following the passage of the food security bill and uncertainty over a possible US led military strike against Syria.

The S&P BSE benchmark Sensex also plunged by 473 points in the late morning trade following persistent selling pressure, triggered by the sharp rupee fall coupled with sustained capital outflows by foreign funds.

A stockbroker reacts as he monitors share prices during intraday trade at a brokerage firm in Mumbai. (AFP Photo/File photo)

The rupee and the benchmark index recovered during the mid-session trade, however both remained volatile. Where Sensex regained the 17,800-level, rupee continued to hover around the 68 a dollar mark.

Continuing its free-fall, the rupee recorded a steep fall of 3.13% (258 paise) on Wednesday, after opening the session at 67.06, sharply below its Tuesday's close of 66.24.

Equity benchmark Sensex was trading at 17,494.80 points, down 473.14 points and Nifty was trading at the 5,138 level down 200 points from its Tuesday's close in the morning trade.

Gold prices also zoomed to a record high of Rs. 34,500 per ten gram with a biggest ever single day surge of Rs. 2,500 in opening trade in bullion market following the currency carnage.

READ: Gold jumps to all-time high of Rs. 34,500 on weak rupee

The rupee has seen a fall of more than 8% this week and 19% as compared to last year.

Forex dealers said besides strong month-end demand for the American currency from importers, concerns related to subsidy burden after the passage of Food Security Bill and capital outflows mainly weighed on the domestic currency.

The food bill, which economists say would strain government finances, comes at a time of decade-low growth.

The bill, a flagship programme of the ruling Congress party passed by Lok Sabha on Monday, is intended to "wipe out" endemic hunger and malnutrition in the aspiring superpower.

The bill is designed to provide food grains to nearly 70% of the population, or 800 million people, for as little as one rupee per kilo.

READ: I knew I was returning to a very difficult pitch: Chidambaram

The Reserve Bank of India earlier warned that increased public spending on the bill could deepen the deficit and fuel already high inflation.

Wednesday's losses also coincided with a global sell-off, with dealers running for cover at the prospect of turmoil in the oil-rich Middle East, while the cost of crude has also hit multi-month highs.

Also fueling the fall were growing worries that foreign investors will continue to sell out of a country facing stiff economic challenges and volatile global markets.

Foreign investors sold nearly $1 billion of shares in the eight sessions through Tuesday - a worrisome prospect given stocks had been the country's one sturdy source of capital inflows, although net purchases so far this year still total $12 billion.

The need to attract foreign capital is critical for the country as the record high current account deficit is a key reason behind the rupee's slump.

Yet policymakers have consistently struggled to come up with measures that can convince markets they can stabilise the currency and attract funds into the country. This failure is becoming an increasing source of tension for India.

AFP Photo

READ: Rupee, stocks point to economy in crisis, FM blames 2008 splurging

POLL: Has the RBI given up on the rupee?

Other reasons for the rupee's drop are however, home-made - failure to move fast enough on economic reform, a series of government corruption scandals, perceptions of policy paralysis and a record current account deficit, analysts say.

Meanwhile, Standard Chartered Bank said it expected the rupee may hit 70 rupees to the dollar before it strengthens.

"It is technically oversold but there is very little buying interest that we can identify at the moment," Nick Parsons, head of markets strategy at the National Australia Bank, told India's Moneycontrol financial portal.

Rising crude prices in the global market, following uncertainty of a possible US led military strike against Syria, also put pressure on the rupee.

In fact, global markets were also jittery after reports said that simmering tensions in Syria may affect geopolitical balance.

READ: Govt under attack over economic crisis

Finance minister P Chidambaram said on Tuesday that the rupee had overshot its true level and the country was one of several emerging markets that was facing such pressures.

"Every emerging market is challenged today. India is also challenged and the impact is also felt on the equity market as well as on the currency market," he said.

The equity market barometer Sensex has fallen over 8% or more than 1,500 points in the last one month.

Chidambaram further said the fiscal deficit would be contained at 4.8% of the GDP even after doling out subsidies for the implementation of the food security bill.

"(Fiscal deficit of) 4.8% of GDP and the absolute number indicated in the Budget is a red line and the red line will not be breached. We have provided enough money for the cost of the food security programme for the remainder of the current fiscal."

"As the roll out takes place in the states, money will be provided. We think that after providing for the food bill we will still remain in the limit we have set for ourselves in the Budget papers," he said.

The total food subsidy budgeted in the current fiscal is Rs. 90,000 crore, of which Rs. 10,000 crore is towards implementation of the food security bill.

The bill will guarantee 5 kg of rice, wheat and coarse cereals per month per person at a fixed price of Rs. 3, 2, 1, respectively.

During a debate on the economic situation in the Lok Sabha, he attributed much of the current economic woes to the stimulus provided to help the industry to tide over the problems emanating from the global financial meltdown of 2008.

"When I took over on August 1 (2012), I knew that I was returning to a very difficult pitch," Finance Minister P Chidambaram said on Tuesday braving the opposition attack over the bad state of economy reflected by declining value of rupee and rising food prices.

President Pranab Mukherjee was the finance minister when the stimulus was provided to the industry. Chidambaram succeeded him as the finance minister in August 2012.

Recalling his return, Chidambaram said, "Fiscal deficit limits had been breached. The CAD had swelled. These were the two main challenges, apart from the number of other challenges that we had to face."

After that he claimed that situation had improved till the unexpected development on May 22, 2013, when the US Federal Reserve announced tapering of bond purchases which sent the emerging markets in a tizzy.

"In the last 12 months there have been days when I have been more upbeat; days when I been more downcast. But the fact is some stability did return to the economy until a completely unexpectedly unexpected event took place on May 22, 2013", he said.

He attributed tumbling of rupee to that announcement of Federal Reserve.

READ: India not worst hit, US's stimulus rollback signals hit most economies

Lacking confidence

The rupee has failed to rebound despite a slew of measures by policymakers, including extraordinary measures by the central bank to drain liquidity unveiled last month and action to curb gold imports and cut on India's oil import bill.

Whether that can be enough remains in doubt given bond yields are surging, threatening to raise borrowing costs across the already slowing economy, while global prices of oil and gold - the country's two biggest imports - have surged this week.

In its latest initiative, the government late on Tuesday proposed setting up a task force to look into currency swap agreements, a measure analysts said could bring some relief if carried out in time by reducing market demand for dollars or other major currencies.

Foreign investors have started to pare down their equity positions, having sold a net $3.5 billion in stocks since the start of July.

In bond markets, foreign investors have sold more heavily, with outflows reaching $4.5 billion so far this year.

Further, Chidambaram on Tuesday announced the approval of infrastructure projects worth Rs. 1.83 trillion ($ 28.38 billion).

(With PTI and Reuters inputs)

READ: Fair value of rupee is 58/$: Deutsche


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