Forex kitty can meet imports for 7 months.

MUMBAI: The Reserve Bank of India managed to stave off a bigger crisis by preventing the rupee from crossing the psychologically sensitive barrier of 60 against the dollar and restricting the exchange rate to 59.58 at close through persistent dollar sales in the market. But while the 60-level has been protected, markets are far from assured as RBI's forex reserves of $290 billion are just enough to cover seven months of imports. Efforts by policy makers, economic advisor to the PMO Raghuram Rajan and Planning Commission chief Montek Singh Ahluwalia to talk up the rupee also didn't yield much results.

Bankers say that the sharp fall - of over 10% in a month - would wreak havoc on businessmen, investors as also the common man. Businessmen who have drawn up plans factoring an exchange rate of 55 for their imports would find their finances in disarray. Similarly, overseas investors would wait for the volatility to end before picking up fresh assets. The sharp fall will directly hurt those planning to buy dollars for overseas travel or education. It would affect all individuals as it makes imports more expensive and force the government to raise fuel prices.

"RBI stepped in to cool the markets by supplying dollars. They sold all the way from just below 60 to 59.50 making it very clear that they wanted to curb volatility," said Agam Gupta, MD & head Rates and FX Trading at Standard Chartered Bank.

"Considering that there are global factors as well in play, tomorrow's opening would depend on how the dollar moves against other emerging market currencies today or how Asian markets open in the morning," he added.

Forex dealers said many investors in Indian debt are leveraged - in other words they have borrowed dollars at low interest rates and have invested in high yield Indian bonds as they have seen an arbitrage opportunity. However, the rise in US yields and the prospects of weak rupee have spooked these investors who have sold close to $5bn worth bonds.

Prospects of funds flow from the US Fed drying up had prompted foreign institutional investors to sell off bonds worth billions of dollars across emerging markets. Bernanke's statement after the two-day meeting of the federal open market committee - the 12 member body that sets US monetary policy - has almost confirmed the worst fears of traders' that monetary stimulus, provided by the US government through three stages of quantitative easing after the Lehman Brothers collapse, would come to an end.

A gradual weakening of the rupee has a self-correcting impact on factors that triggered the slide as imports become unattractive, exporters earn more and prices of Indian assets turn more attractive to overseas investors. But in the short-term it would cause major damage to government finances which bankers say, budgeted its imports at 55 to the dollar. Worsening government finances raise the risk of a downgrade. According to Singaporean bank DBS "For India the risk of a ratings downgrade are growing as the current account deficit has expanded again following exports weakness and evidently government measures are not working to solve the twin deficit issue".

Source : timesofindia.indiatimes.com