Indian Rupee Continues To Fall, Crosses 56 Mark Against Dollar; Analysts Seek Strong Corrective Action

The rupee touched the new psychological level of 56 against the dollar in early morning trade Wednesday despite the Reserve Bank of India's interventions in the Forex market. The rupee traded at a low of 56.04 at 13.39 hours ISD Wednesday.

The rupee tumbled to 55.39 against the dollar Tuesday and continued with its fall Wednesday even after the RBI said that it would buy back the government bonds aggregating Rs 120.00 billion Friday to ease out the liquidity situation.

Consistent with the stance of monetary policy and based on the current assessment of prevailing and evolving liquidity conditions, the Reserve Bank of India has decided to conduct Open Market Operations by purchasing the following government securities for an aggregate amount of [Rs] 12,000 crore on May 25, 2012 through multi-security auction using the multiple price method, the RBI announced in a statement Tuesday.

The heavy demand for the dollar from importers and banks coupled with a capital flow outside affected the rupee. The euro zone debt crisis is still casting its shadow over the euro as it stuck to its four month's low against the dollar on Wednesday. Meanwhile, the dollar gained against most of the major currencies in New York after the Fitch cut Japan's sovereign rating from AA to A+.

However, financial analysts believe that the Indian rupee's depreciation has much to do with the internal policy crisis and trade deficit in the country than the euro zone crisis.

Analysts opine that the dollar-rupee is headed higher because of the huge current and fiscal deficit the country has.

The fiscal deficit actually works as double sword, in the sense that it weakens confidence and investment into the country. The other problem it creates is the transmission mechanism of a higher dollar-rupee, which should ordinarily lead to a contraction in the current account deficit, gets delayed because we have administered price for imports such as fuels, Rajeev Mahrotri, head of trading, IndusInd Bank, told CNBC-TV18.

This could lead to inflation which is not demand led, but currency-led. If the fiscal deficit slips further we could possibly see the rupee at 58 to 60 a dollar and calculations will go haywire, Ambareesh Baliga, chief operating officer at Way2Wealth Brokers Pvt Ltd, told Bloomberg UTV.

Apart from this, the policy gridlock in the government and the rising inflation also have weighed in on the rupee.

The weak investor confidence in the Indian economy has prompted high foreign funds erosion from the country. According to a Bloomberg report, foreign investors took out a net $71 million from local shares this month.

Though the Reserve Bank of India has been intervening to defend the rupee, it has not been able to make a strong impact on the market as its measures are not backed by aggressive government support.

The onus of saving the rupee is on the government now. The situation can be addressed by stern and immediate policy action, moneycontrol.com reported Sanjay Mathur of RBS as saying.

Stock Markets Register Losses

Bombay Stock Exchange's benchmark Sensex opened on a negative note and continued to trade under pressure as the falling rupee and foreign fund outflow impacted it negatively. The Sensex lost 125 points and was trading at 15900 and Nifty was at 4819, down 41 points at 2.00 pm Wednesday.