The rupee fell sharply against the dollar to close at an all-time low of Rs 50.02 . The 35 paise fall from its previous closing was prompted by heavy dollar demand from FIIs exiting Indian stocks and oil companies.
There was another reason for the precipitious drop an arbitrage opportunity between the domestic rate and the offshore rate for non-deliverable forwards.
Forward trades on the partially convertible rupee under which a buyer can, say, buy dollars for a delivery at a future date but at today's price are also conducted in offshore markets, such as Singapore and Dubai. But, in these trades, the dollars are not delivered; only the difference in the prices is paid out. It is a mechanism used by investors for hedging their India exposure.
Lately, the rupee-dollar rate in these markets had climbed to Rs 50.80/95, providing a clear arbitrage opportunity. This sparked off a rush to buy dollars in the domestic market for selling them in the offshore markets.
The rupee had earlier breached the psychologically crucial level of Rs 50 per dollar on October 27, but later recovered during the day to close at 49.95 per dollar. Since January 1, the Indian currency has depreciated by 27% from Rs 39.42 per dollar.
The rupee started depreciating since May this year, when the FIIs accelerated their sell off of Indian equities. According to RBI data, in the past six and a half months, rupee has depreciated by 25% from Rs 40 per dollar to below Rs 50 per dollar. The depreciation gained momentum since September, 2008, after the financial blow out in US and Europe. In the past two months, the Indian currency has lost 11% value from Rs 45 to below Rs 50 per dollar.
Posted by Mohan Sehgal | Views 276 | Share Blog
