Mumbai, Aug. 21: The Reserve Bank of India — the reluctant defender of the rupee — seemed like a tragic figure tilting at a whirlwind that flattened the local currency and stocks today.
None of its measures and actions in recent weeks has helped bring stability to the volatile markets.
The rupee swooned to an all-time low of 64.54 against the dollar, and investors pummelled stocks triggering a 340-point slide in the sensex as fears appeared to escalate that the US Federal Reserve would start tapering its $85-billion-a-month bond buying binge that has funnelled cheap money to the most distant parts of the world.
The rupee ended the day at 64.11 — a new closing low —with the forex market reporting brisk demand for the greenback from importers.
Market pundits were struggling to make sense of the Reserve Bank’s decision yesterday to buy bonds and pour new money into the system — an action that seemed to fly in the face of its recent efforts to drain cash from the market to prop up the rupee.
“The market is confused. One group of pundits believes that the steps the RBI announced yesterday is an indication it will no longer take any fresh liquidity tightening measures. But this could exacerbate the pressure on the rupee. But there are others who believe the RBI will intervene whenever the forex market turns volatile. The market seems to be divided on whether or not the RBI will intervene,” said a foreign bank official.
Yesterday, the RBI said it would buy bonds worth Rs 8,000 crore to ensure credit flow to the productive sectors of the economy. It said more such measures would be taken if required. But on August 8, the central bank had announced its decision to drain Rs 22,000 crore from the system every Monday. The two measures seemed to be at odds with each other.
The sensex was on a roller-coaster today: it rallied by 300 points at one stage. But it then did a somersault and went into a sharp dive, closing another frenetic day of trading at 17,905.91, a loss of 340.13 points or 1.86 per cent — hitting its lowest level since September 11 last year.
Foreign institutional investors have turned net sellers of shares in August — and appear to be extending their selling streak for the third consecutive month.
Brokers said the double tumble in the rupee and stocks occurred because the markets were eagerly waiting for the release of the minutes of the Federal Reserve’s policy-making committee that met in July. The mavens hope to get some insights to make an assessment of the timing of the Fed’s tapering of its bond purchase programme. Many expect this to happen in September.
The RBI’s measures to increase the availability of cash in the banking system worked only in the bond market where prices rallied.
The rupee has lost 292 paise, or 4.77 per cent, in five straight sessions.
Deutsche Bank today said it could hurtle to 70 against the dollar in a month or so, though it could make a small recovery by the end of the year.