Reserve Bank of India on sold US dollars as Rupee slid to 48/$ on 14 September

The Reserve Bank of India on 14 September 2011 sold US dollars to save the local currency (rupee)from a sharp slide. Fears of a debt default in the euro zone, following the rating downgrades of two of the largest French banks, and growing concerns over global growth led the rupee to close at a 16-month low of 47.65 against the dollar, having touched 48.01 on 14 September.

The Indian currency depreciated 6.86 per cent since April 2011 but further loss was capped by some amount of selling of dollars by the RBI. RBI participation was even less than $200 million, but helped in more dollar dumping by banks and exporters. As a result, the rupee fell only by five paise on 14 September  as compared to a fall of 38 paise on 13 and 65 paise on 12 September.

The rupee breached the psychological the 48.01 mark to the US dollar, its lowest since September 2009, due to shortage of greenback. Investors sought dollars as asset when currencies all around are sliding due to sovereign crisis. It ended 0.1% lower at Rs 47.64 as concerns over European debt deepened.

The rupee’s intra-day slide on 14 September 2011 to 48.02 against the dollar, a level not seen since September 2009 proved that an an economy, even if not heavily dependent on external trade for growth can get deeply affected by global financial turbulence.

The rupee’s fall was steep enough to call for the intervention of the Reserve Bank of India which intervened in the currency markets and sold dollars to stem the currency’s slide. The central bank has not sold dollars since the Lehman crisis of 2008. The dollars were sold to support the falling rupee, which drifted close to a two-year low in early trade on 14 September 2011.

A depreciating rupee will lead to raise in the country’s import prices in terms of dollars and this will is likely to lead to a further worsening of the trade deficit (the gap between what is earned in exports and what is paid for imports). That means if global commodity prices fall, there’s a chance that India might not benefit because it will still have to pay more in terms of rupees. The different sectors with the exception of the IT sector will not be able to capitalise on a falling currency to boost overseas demand or margins.

The currency may get some support if raising the overseas borrowing limit beyond the current $30 billion is considered by the government and the central bank. A hike in the cap could help improve dollar liquidity and support the rupee over the medium term.