Mumbai : The runaway rupee plummeted to 66 against the dollar on Tuesday. As the rupee nose-dived, the stock markets went into a tailspin and the BSE Sensex closed 590 points or 3.2 per cent lower at 17,968, while the Nifty closed below the 5,300 level, dipping by 189 points.
Shares got a severe thrashing on panic sell-off triggered by the further slide in the already bruised rupee and mounting fears of a prolonged and painful economic slump amid a sovereign downgrade risk. There was frenzied selling in heavyweights across the sectors by foreign institutional investors and domestic players.
Neither the RBI’s knee-jerk intervention, nor the Finance Minister’s repeated assertion that the government is in control of the economic situation, helped rein in the currency, one of the worst performers in Asia.
The unbridled rupee ended at 66.24, a record closing low, after crashing over 3 per cent against Monday’s close of 63.20. It hit all-time low of 66.30 minutes before the closing bell. Observers attributed the rupee crash to the passage of the food security bill in the Lok Sabha, which has set the alarm bells ringing about the country’s fiscal health.
The food subsidy budgeted this fiscal is Rs 90,000 crore, of which Rs 10,000 crore is towards the Food Bill. Global rating agency Fitch had on Monday warned of a downgrade if the country misses the fiscal deficit target. P Chidambaram sought to dispel fears that the $20-billion Food Security Bill will widen the alarming fiscal deficit even further. “4.8 per cent of GDP is a red line as far as fiscal deficit is concerned. This red line will not be breached,” the finance minister said.
The minister reiterated that the rupee has overshot its true level. “We have to be patient and firm and do what is required to be done. Rupee will find its appropriate value,” he said.
His comments failed to convince investors though. “The Food Security Bill is the key reason for the rupee’s fall today. It would open floodgates for (credit) rating downgrades, if the fiscal deficit is not reined in,” Ashtosh Raina, head of foreign exchange trading at HDFC Bank, told a wire service.
However, some experts felt that markets knew the Food Bill was coming and that it is not going to impact us in this fiscal year.
Meanwhile, Brent oil, which spurted to $113 a barrel after US threat of a limited strike over suspected chemical weapons attack in Syria, too, is having a debilitating impact on the rupee.
Gold futures, too, touched a record high of Rs 32,500 on Tuesday. This price spiral is expected to have a cascading effect on the aam admi.
A steep hike in diesel price is likely after the end of the monsoon session of Parliament. Sources in the Ministry of Petroleum and Natural Gas said that there is a need to hike the diesel price by at least Rs 5 per litre. The ministry feels that the Rs 3 per litre diesel price hike is meaningless, when under-recoveries are over Rs 10 per litre. If diesel prices go up, Indian Railways is sure to take a decision on further hike in freight tariff. It will review the fuel adjustment component in the wake of rising energy cost but passenger fares may not be touched.
Yet another explanation for the rupee tumble was that that the RBI’s tight monetary policy has led to rising mark to market losses for banks, which will now have to make significant provisions for these losses. ”Even safe names like HDFC have taken a hit,” an investment banker said.
There was a sharp recovery in the rupee in late afternoon trade on reports that the government was considering currency swaps with other countries, but the pullback did not last long.
Earlier, the RBI sold dollars starting at 65.90 levels, but after a brief recovery, the rupee was back to its losing ways.
The rupee plunged further to 102.80 against the pound from the previous close of 100.12 and tanked against the Japanese yen to 67.76 per 100 yen from 65.21. It slumped to 88.36 per euro from 86.00.