Why rupee fell in trade today despite govt's relief steps to arrest currency depreciation

Despite steps such as withdrawing withholding tax on Masala bonds, allow some breathing space to foreign portfolio investors, and check non-essential imports and promote exports in order to arrest the decline in rupee, the local currency fell over 50 paise below the 72 level per dollar mark in trade today.

The Modi government on Saturday announced various measures to stem the fall in rupee which has declined nearly 13% till date. Despite steps such as withdrawing withholding tax on Masala bonds, allow some breathing space to foreign portfolio investors, and check non-essential imports and promote exports in order to arrest the decline in rupee, the local currency fell over 50 paise below the 72 level per dollar mark in trade today.

The fall in currency was also accompanied by market fall with the Sensex and Nifty falling over 1.20% each in afternoon trade.

Gaurang Somaiya, currency analyst at Motilal Oswal Financial Services Ltd said, "Recent measures taken by the government to arrest the rupee depreciation have been short lived and have had a more of a sentimental impact as the expected flows could be to the tune of $8-$10 billion and market was expecting the flows to be as high as $15-$20 billion. The steps taken could serve the purpose to resolve near term fixes but the government will have to look into measures which could serve as long-term prospects. The government has kept doors open for more measures but at present is not willing to reveal more on the same. We expect that the central bank in this year could consider raising rates by 50 bps that could provide some support to the currency."

Currently, rupee is Asia's worst performing currency against the dollar in 2018.

Foreign brokerage Nomura said the measures "underwhelm expectations" and also signify policymakers moving from the first line of defence which includes allowing currency depreciation, forex intervention and positive comments, to the second line which include measures to boost capital inflows, cut imports and boost exports.

The Japanese firm said it expects more measures going forward.

The measures include permitting manufacturing sector entities to avail ECBs up to $50 million with a minimum maturity of one year versus the earlier period of three years, removing caps on single group exposure for foreign investors, exemption from withholding tax for issuance of masala bond issues and removing restrictions on Indian banks' market making in masala bonds.

Deepak Jasani, Head of Retail Research at HDFC Securities said, "The measures announced by the govt over the weekend are important as they signal government's reluctance to allow the Rupee to fall below 73 vs the USD. The RBI also gets a message as to what should be the pace of their support / intervention in the forex markets. The easier part i.e. procedural hurdles are the first to be reviewed and if need be more measures may be in the offing.

The Govt has hinted at curbing non-essential imports and boost exports. This is important as the share of non oil imports has been rising fast over the past few quarters. The govt's reiteration of sticking to the fiscal deficit targets will be welcomed by the global investors, though the local people with short term views would like the govt to take populist measures and leave the next govt with a tougher task on hand. Allowing higher FPI participation will help attracting more inflows and stabilise the value of Rupee.

These measures may only halt the near term weakness. Their impact would take a few weeks to be felt. A lot would depend on the situation globally and especially in the emerging markets. The need for more steps will depend on the emerging situation."

FM Arun Jaitley on Saturday said the government plans to cut down "non-necessary" imports, ease overseas borrowing norms for the manufacturing sector and relax rules around banks raising rupee-denominated overseas bonds.

Kotak Securities in a note said, "The negative sentiments around the INR are likely to mitigate in the near term given the intent of the government to bridge the current account deficit funding gap. The government has highlighted that it will stick to its FY2019 fiscal deficit target of 3.3% through buoyant direct tax revenues and overshooting of its divestment target even as it maintains its capital expenditure targets. The RBI, also, announced Rs 10,000 crore of open market operations purchase due on September 19. The combined effect of these announcements will be positive for yields and INR in the near term."

"There were expectations that something substantial will be planned to hold the rupee, but the measures the government had in hand were limited and a little long term in nature. So they will take their own time to have an impact," said Naveen Kulkarni, Head of Research at Reliance Securities.

"Rest of the week, markets will likely be on the weaker front," Kulkarni added.