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Rupee hit all time low; local stock needs more volume

6/21/2012 11:24:34 PM

Rupee fell to its lowest record 56.55 against the US Dollar. India Inc needs to have more volumes in local stock.

By Asim Khan


Mumbai: The Rupee recorded its lowest rate on Thursday, falling for the fourth day in a row, the Rupee declined by 31 Paise to 56.55 at around 1:20 PM against the US Dollar.


The fall occurred tracking a slump in global risk assets, including the euro, and hurt by continued greenback demand from oil importers. The previous record low was 56.52 on May 31.


The Reserve Bank of India (RBI) on Monday kept the cash reserve ratio (CRR) unchanged at 4.75 per cent. No cut in the repo rate was announced, maintaining it at 8 per cent. After expanding by 8.4 per cent for two consecutive financial years, the GDP slumped to 6.5 per cent in 2011-12. The country is now also grappling with high inflation, slowing industrial growth, sliding rupee and declining exports.


Retail inflation for the month of May moved up marginally to 10.36 per cent from 10.26 per cent in April. Over the last one month, the funds borrowed from the repo window were on average 1.5 per cent of the deposits. The RBI's comfort level is -1 to +1 per cent of net demand and time liabilities. Country's benchmark inflation rose in May to 7.55 per cent, keeping price pressures elevated and making it harder for the RBI to revive economic growth. The rise in the wholesale price index (WPI) from 7.23 per cent in April came as both food and fuel prices picked up.


Since April this year, just after Pranab Mukherjee unveiled his budget that proposed a raft of tax measures, including retrospectively taxing indirect transfers, trading volumes in American Depositary Receipts (ADRs), which represent stocks of some of India's top companies such as Infosys, HDFC Bank and Dr Reddy's Laboratories (DRL), have spurted and in some cases are higher than volumes of such stocks on Indian exchanges.


Since mid-March through May-end, open interest of Nifty futures traded in Singapore has increased 26% to 3,49,666 contracts while that of Nifty futures in the local market has fallen by a similar extent to 5,08,193.


Commodity prices have been on the decline since the beginning of 2012 as reflected in the 12% drop in the S&P Commodity Index. Brent crude prices have dipped 19% so far this year, while copper is down 7%. Gold and silver are up 2% each, though.


During the March quarter the rupee was trading at an average 50.3 to the US dollar. Though raw material prices have fallen since the March quarter, the value of the rupee too has declined, to 55-56 levels to the US dollar, denying India Inc any significant gains in raw material costs. The rupee decline has muted the effect of the global drop in commodity prices in the local market. For instance, Brent crude prices have dropped 15.9% since the beginning of the current quarter, but in India, the prices have fallen just 11.6%. Similarly, the 19% global drop in palm oil prices quarter to date has translated into only a 2.3% decline in the domestic market.


The Bank for International Settlements estimating the trade at 50% of the total offshore and onshore volumes. Rupee volumes too have surged on the Dubai Gold & Commodities Exchange (DGCX), whose share of overall exchange-traded futures, including NSE, MCX Stock Exchange, United Stock Exchange and Bahrain Financial Exchange, in dollar-rupee contracts has jumped three-folds to 16% from the year-ago level against a 5-8 percentage point jump in NSE and MCX-SX volumes over the same period.


In the last three-four years, market volumes have not grown, with a lot of it shifting from the cash segment. Local mutual funds have also not grown much with a drop in investor interest. The current challenge is to ensure significant liquidity in the local markets and the participation of domestic savers in equities. Policy should focus on two key elements - liquidity and transaction costs, like in South America all the major markets have more volumes in local stocks on the New York Stock Exchange than the local markets. That is something which any large market needs to protect.

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