The rupee closed at 44.03 per dollar, beyond the previous low of 43.70 hit in August 1998, and down from 43.6775/6825 at Tuesday's close. However, news agencies put the closing figure variously, ranging between 44.03 and 44.08 per dollar.

Temporary demand-supply mismatch: Sinha

The news caused a stir even in government circles, though it is the autonomous Reserve Bank of India that is vested with the responsiblity of managing currency movements. So much so that in New Delhi, Finance Minister Yashwant Sinha said the rupee plunge is a "temporary mismatch between demand and supply" and hoped that the central bank would respond adequately to the situation.

Dollar purchases by the State Bank of India, or SBI, the country's largest commercial bank and often regarded as a surrogate for the central bank in the currency market, gave other players confidence to sell the rupee.

'Establishment out to weaken the rupee'

The SBI's steady dollar purchases that drove the rupee's 36 paise (0.36 rupees) slide gave rise to speculation that there may be a planned move by the authorities to weaken the rupee while accumulating dollars to pay for defence imports.

"It's not speculation...it is almost certain, given their (Reserve Bank of India's) silence. The market has in the past seen them stepping in when the fall has been far less severe," a dealer at an American bank said.

Earlier dollar sales by the SBI, along with speculation that the Reserve Bank of India, or RBI, would issue a statement supporting the rupee, had braked the rupee's fall, dealers said.

But with no RBI statement forthcoming, and the SBI joining the dollar buyers, the rupee's decline resumed. However, the RBI did talk in the evening after trading hours. More of that later.

"The market was taken aback by this move as it was expecting the SBI to sell dollars to prop up the rupee," a dealer at a state-run bank said.

Fredy Castelino, chief forex dealer, Mecklai and Mecklai Financial Services, said the oil import covering and heavy corporate dollar demand put pressure on the rupee.

K N Dey, vice-president, Mecklai and Mecklai Financial Services Limited, said, "The fall in rupee value was imminent, but such a major fall was certainly not expected by us.''

According to Dey, the short covering by foreign banks, the SBI's dollar buying, import covering by public sector units or PSUs on account of oil import payments and the substantial outflow of dollars on account of FIIs selling in stock market were the prime reasons for the rupee's fall.

''The SBI's dollar purchases at the higher level of Rs 43.75/76 per dollar indicates that unless there is a sufficient dollar inflow, the rupee will not appreciate from this record low,” Dey said.

Central bank not unduly worried

However, dealers said the rupee's latest slide was unlikely to worry the central bank too much as it had the market firmly in its grip. The rupee is not convertible on the capital account, and central bank rules restrict the scope for speculation in the market, keeping volumes fairly thin.

The RBI espouses the view that the market can set the trend for the rupee, so long as the movements are moderate.

The rupee's 2.9 per cent decline against the dollar since end-March 1999 until Tuesday, reflects that approach.

The latest slip is partly fuelled by slowing dollar inflows from foreign investors in Indian stock markets.

"If you look at the numbers for the past few months, the supply side for the dollar has really been from the foreign institutional investors," S Rosha, head of foreign exchange trading at HSBC treasury, said.

"That is drying up now leading to an imbalance in demand and supply and that's what pressuring the rupee right now."

Other factors hurting the rupee include drought in parts of the country and the threat of higher US interest rates.

The drought, said to be the worst in a 100 years, has raised concerns that agricultural output and rural incomes will fall, dampening the consumption-led recovery that has underpinned a turnaround in industrial growth rates.

"The stock market weakness is beginning to have a bearing on the currency. The drought is a worry. Besides, Asian currencies are weaker," the head of trading at another foreign bank said.

Foreign funds have been steady buyers of Indian equities despite the persistent stock market weakness, but dealers said the recent reversals in the flows had led to some concern.

On Monday, foreign funds sold over $100 million worth of Indian equities but for the year to date net purchases amount to $1.6 billion.

Later in the day, observers summed up that heavy dollar buying by foreign banks and the SBI caused panic in the forex market, leading to the rupee meltdown in a one-sided trade. The usual dollar-selling support from the SBI was not in evidence today. Nor was there any intervention by the RBI.

“This may be the first time in the recent history of forex market, that the apex bank did not intervene in the market activities when rupee reported a major intra-day fall,'' a senior forex dealer said.

It was the short-covering by foreign banks and heavy buying at higher level by the SBI that pushed down the rupee value above Rs 44-mark in the late afternoon trade, forex dealers said.

Spot rupee under pressure

The pressure on spot rupee also reflected on the forwards as the sixth-month forward premia too ended lower at 2.40 per cent from the previous close of 2.25 per cent while the one-year premia eased down to 0.75 per cent from 2.40 per cent, Castelino said.

Rupee relatively stable against other currencies

Experts in the forex market also linked the rupee fall with the euro and said that the rupee continued to be stronger against euro, even as the euro strengthened against US dollar in the recent past.

But with today's fall, the rupee now came to an expected level against euro, and at par with euro-dollar movement.

The six-month premia finished at 2.40 per cent while the cash/spot premia closed at 0.50-0.75 paise.

The month-wise premia in paise are: May 3.25-4.50, June 10/12, July 17/19, August 27/29, September 38/40 and October 48/50.

In the overseas market, euro, sterling pound and Japanese yen were at Rs 40.12, Rs 67.02 and Rs 40.46 to the rupee respectively.

Meanwhile, the RBI fixed its reference rate at Rs 43.74 per unit for a day against its previous fix of Rs 43.66 per unit.

Reuters, UNI

ALSO SEE

April 19, 2000: Rupee hovers near 43.70

Aug 12, 1998: Rupee touches all-time low; RBI checks crash, Rs 42.95/43.05

Jan 14, 1998: Rupee crashes to a historic low of Rs 40.15

Aug 21, 1998: I-Sec study: 'Re will fall again after shock due to RBI moves wears off'

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