The Indian currency today fell to an over two-year low of 52.16 rupees a dollar due to panic purchases by oil companies.
The central bank had introduced special market operations for state-owned oil companies to convert their oil bonds into dollars, after the rupee hit an all-time low of 52.18 a dollar on Mar 3, 2009.
The move was successful in providing liquidity and financial stability to oil companies, which otherwise would have tapped the foreign exchange market and put pressure on the rupee.
Dealers peg oil importers' dollar demand around $6 bln on a monthly basis.
"If RBI does this (exclusive dollar purchase window), the demand for the
dollar should ease, hence smoothening the fall in the rupee," said a treasury official with a large state-owned oil company.
Currency dealers attribute rupee's fall mainly to the rise in dollar demand from oil importers, and with the rupee today ending just 3 paise away from its all-time low, if the RBI fails to provide dollars to oil refiners, the rupee is expected to hit a fresh all-time low in the next few trading sessions.
Though the market is rooting for the central bank to aggressively intervene in the foreign exchange market to curb rupee's fall, many currency analysts are of the opinion that the RBI does not have sufficient wherewithal to defend the local currency.
"The situation in 2008-2009 was very different from what we have now," said Bitupan Majumdar, currency analyst from JRG securities.
"In 2008-2009, we had (foreign fund) flows coming into the country, but now the current account deficit is widening and foreign banks that hold Italian and Spanish bonds are in trouble...Therefore there is a shortage of dollar liquidity, he said.
In 2009, foreign institutional investors had pumped a net $18.077 bln on a net basis in India's debt and equity markets compared with $4.65 bln in 2010.
Last week, RBI Deputy Governor Subir Gokarn had said that defending the rupee could be risky in a situation where global factors alone are pushing the exchange rate.
"So, use of reserves aggressively to defend exchange rate, which may not be defensible beyond a point, we will end up with the same pressures and lower cushion and lower self defence," Gokarn had said.
India's forex reserves stood at $314.34 bln as on Nov 11, 2011.A widening current account deficit and slowdown of capital inflows have
forced the RBI to take an "hands off" approach.
According to RBI data, current account deficit during Apr-Jun widened to $14.1 bln from $5.4 bln in Jan-Mar and $9.68 bln in Oct-Dec 2010.
Foreign funds have invested just about $300 mln in India in the last two months. Net investments since April have been $2.88 bln on a net basis.
Clearly, with current account deficit widening and foreign fund flows slowing down, a dollar window for oil companies will help the RBI contain the rupee's fall and save its precious firepower for more difficult times.
Sent from my BlackBerry® smartphone