rediff.com: Rupee sinks to all-time low of 45.16/$

The rupee slipped further into uncharted territory on Tuesday as India recorded a 26 per cent rise in its trade deficit for the April-June quarter over year ago levels.

The Reserve Bank of India launched a defence of the currency on July 21 but the stabilising effects have worn off and the rupee closed at an all-time low of 45.15/16 per dollar.

The currency struck a late intra-day record low of 45.17, weakening from Monday's close of 45.01/03 as importers rushed to cover positions.

The RBI's liquidity squeeze and higher interest rates have proved powerless against a market driven by genuine trade flows, rather than excessive speculation, dealers said.

"We have a substantial trade deficit which needs to be funded and this has resulted in a mismatch of flows," Surendra Rosha, head of foreign exchange trading for HSBC in Bombay, said.

Rosha expected the rupee to stabilise around 45.10/20 for now but other analysts suspected the RBI might opt to squeeze liquidity again to brake the slide.

"My own feeling is that some more tightening of interest rates by the RBI is on the cards. The market is surprised because it is not finding the measures sufficient enough," R Ravimohan, managing director, Credit Rating Information Services of India Limited, said.

The central bank raised interest rates last month to increase the differential with the United States, in order to persuade exporters to remit their earnings faster and non-resident Indians to deposit funds in their home country.

But fresh speculation that US rates will rise again has undermined the RBI's strategy.

The RBI has in the past appeared comfortable with allowing an orderly depreciation of the rupee in line with inflation differentials between India and the major economies.

So far this year the rupee has lost only around 3.8 per cent against the dollar, which is fairly modest compared to many other currencies.

Arjuna Mahendran, head of economic research South Asia at SG Securities in Singapore, said he expected the rupee to hit 45.90 by the end of the year.

The latest trade data underlined the pressures building on the rupee, which is only convertible on the current account.

Even a 27.55 per cent surge in exports in June could not counter the growing import bill, swelled by high-priced oil.

The oil bill for the latest quarter was 94 per cent higher than a year ago, and at $3.94 billion it accounted for nearly 30 per cent of total imports.

"There is a general upswing in the economy and the trade gap has narrowed a bit from what it was in May but going forward the balance of payments (BoP) will come under pressure because capital inflows are weak and not enough to compensate for the gap," said Shuchita Mehta, economist at J P Morgan in Bombay.

"The BoP for the quarter is not very good," she added, "The only saving grace going forward are invisible receipts and one should take a closer look at these."

Analysts expect India's balance of payments to fall from 1999-2000's (April-March) $6.4 billion surplus, and the pessimists expect it to barely stay in surplus.

Growing software services exports provide a bright spot, and the industry expects overseas earnings to rise almost 60 per cent to over $6 billion this year.

Looking ahead, a softening in global oil prices should provide some relief, as will expectations that strong global demand will help export growth maintain its momentum.

For now, foreign funds cutting their exposure to Indian stock markets has added to the rupee's woes.

Foreign funds sold a net $324.7 million worth of equities in July, helping to pull the benchmark Bombay index 15 per cent below its starting level for 2000.

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