Mumbai: The Indian rupee staged a sharp recovery yesterday after suspected heavy dollar selling by the central bank, preventing the battered currency from slipping to a record low on the same day that the authority ushers in a new governor.
The rupee advanced 1 per cent to 67.09 per dollar in Mumbai, prices from local banks show. It fell as much as 1.3 per cent to 68.62 earlier, and has weakened 11.5 per cent this quarter, the worst performance among 24 emerging-market currencies.
Raghuram Rajan, a former chief economist at the International Monetary Fund (IMF), took charge at the Reserve Bank of India (RBI) as the country faces its worst economic crunch since a balance of payments crisis two decades ago.
In a reminder of the uphill task he faces, a report yesterday showed that activity in India's services sector shrank in August for the second straight month for its lowest reading in four years.
Hefty budget deficit
The country is grappling with a record current account deficit and a hefty budget deficit, factors both weighing on the rupee. Concerns about rising prices for oil and gold, India's two biggest import items, are keeping pressure on the currency.
Dealers cited heavy central bank intervention via state-run banks, which coupled with dollar selling by foreign banks related to arbitrage opportunities with the offshore rupee market, pulled the rupee sharply back from its day's low of 68.62 per dollar. The currency hit a record low of 68.85 last week, marking a drop of 20 per cent from the end of 2012.
Rajan, who famously predicted the 2008 global financial crisis, officially becomes the 23rd governor of the RBI after signing an oath of secrecy yesterday. But he will not take charge operationally until today.
Rajan has been circumspect in public, revealing little about whether he will pursue the policies of his predecessor, Duvvuri Subbarao, or change tack. "The rupee will be Rajan's first and key challenge," said Vikas Babu Chittiprolu, a senior foreign exchange dealer at state-run Andhra Bank.
Earlier, an advisor said that the rupee could sink to a record low past 70 per dollar and the Reserve Bank of India's struggle to stem the drop has hurt its credibility.
"There's a high probability" of the rupee ending 2013 at 65 to 70 and an "external shock could push it above 70," Arvind Virmani, a member of the Reserve Bank's advisory panel on monetary policy, said in an e-mail.