RBI rush to sell dollar lifts rupee from 4-month low Close.

 MUMBAI: The rupee recovered from a four-month low on speculation the Reserve Bank of India (RBI) sold US dollars as importers rushed to buy the greenback amid record trade deficit. But the central bank's ability to defend the rupee's value in coming months is questioned due to receding portfolio flows and upcoming corporate loan repayments.

Traders and analysts see the rupee touching a record low this year as India remains the only country among the so-called BRIC club with a current account deficit and dependent on portfolio flows to feed its demand.

The currency ended at 52.96 to the US dollar after touching a four-month low of 53.02. State-owned refiners rushed to buy dollars for crude import, fearing that the currency could slide further amid exports turning negative for the first time since the credit crisis.

India's vulnerability is exposed as it remains probably the lone country in the region where the currency is depreciating while others attract inflows due to cheap liquidity sloshing around the global financial system as the US Fed and European Central Bank keep interest rates at record low.

"Rupee's link with peer currencies has broken," said Satyajit Kanjilal, CEO of Forexserve, which advises companies on risk management. "While currencies are up in Singapore, Korea, Indonesia, Taiwan, Malaysia and the Philippines, the rupee has fallen. Besides the huge oil import bill, the market has sensed that RBI's ability to react is comparatively lower."

The Indian currency was the best performer in Asia this calendar due to trading curbs by the central bank and a record foreign inflows in the January-March quarter. But investor excitement is waning amid new retroactive tax proposals and inaction on the economic policy front. In the month of April alone, foreign institutional investors sold net assets worth 1,657 crore, after they invested 39,375 crore since January.

"It is not much of a surprise because after RBI initiated the measures to address rupee volatility three or four months ago, we have seen reduced volatility but really nothing has been done in terms of addressing the issue on inflows," Manoj Rane, MD & head, fixed income & treasury-India, BNP Paribas, told ET Now. "We have not seen much inflows," said Rane, who also said he won't be surprised if the rupee touched 55. The currency touched a life's low of 54.30 per dollar on December 15.

India's trade deficit touched an all-time high of $185 billion as export growth remained muted while imports soared 32% to $489 billion. India's trade deficit has been hit by the economic slowdown in the Asian economies, as India's has become increasingly dependent on them for its exports. Almost 53% of export demand for Indian merchandise comes from Asia, 20% of which is from the Middle East and only 20% from Europe.

"Exporters are holding back with their dollars, expecting further depreciation," said Anil Bhansali, vice-president, Mecklai Financial. "The current environment is not very investor friendly, and, therefore, the reversal in the capital flows, and this would continue to be the case unless structural reforms happen at war footing.

Source : economictimes.indiatimes.com