Rupee slips by 4.50%

Last week saw the Rupee first appreciate on the back of the steep interest rate hikes by the central bank and then depreciate as the equity markets continued to plunge on global cues as well as domestic issues. The currency pair finally ended the week little changed closing at 42.88 last Friday.

Portfolio outflows, though slightly moderate continued for the sixth successive week. The benchmark index has plunged by over 18% in the month of June alone over domestic political tensions and weak global cues. Last week saw portfolio outflows of USD 375 mn, bringing the FYTD total outflows to USD 3.8 bn.

The RBI hiked the benchmark repo rate by 50 bps as well as the CRR by 50 bps last week in an effort to curb spiraling inflation. The CRR hike would drain about INR 170 bn from systemic liquidity in two trenches and may trigger inter-bank Dollar sales, thus providing some support for the Rupee in the near term.

Indian equity markets have fallen considerably over weak global cues and the domestic political turmoil. As pointed out earlier, the current investor sentiment towards EM economies is generally negative because of the twin problems of slowing growth and rising inflation, which has led to significant outflows from these economies. An acceleration in these outflows would pose a near term downside risk for the currency.

For the year 2007-08, current account deficit was recorded at USD 1.04 bn while capital account surplus stood at USD 26 bn. Overall BoP surplus stood at about USD 25 bn.

The currency pair is expected to trade in the 42.80-43.30 range this week.

Trends in Dollar Rates

Indian currency has weakened about 4.50% as compared to same day of previous year. China, Turkey, Sri Lanka, and Bangladesh lead the chart with 9.90%, 8.03%, 3.35% and 0.82% of appreciation as compared to previous year.

Trends in Euro Rates

All the major suppliers except Turkey witnessed depreciation against EURO during the year under below.