The rupee has once again touched the psychological 56 mark against the dollar. The reason this level gains importance among currency traders is because the rupee has tested this level on nine occasions in the last five months. The rupee has been gyrating between 55-56 levels since May 2012. The Reserve Bank of India is believed to intervene every time the currency touches the 56 level pushing the currency back towards 55 levels. This 56 level is now the new battleground between the central bank and the market. Economic data coming out of the country and the developments in global markets indicate that the central bank is fighting a tough battle. The recent rise in the rupee is on account of rising oil prices, which have moved up by 17% in three months. Oil refiners are being reported to be buying dollars in the market, while at the same time importers have stepped up purchases of gold, which has touched an all-time high level of Rs 32,758 for 10 gms. Gold prices are up 5.1% over the last three months. Nearly 45% of India’s imports are on account of imports of these commodities. A decline in exports by 15% for the month of July 2012 announced recently contributed to the depreciation of the rupee. While currency markets globally are volatile ahead of the important announcement expected from European Central Bank President Mario Draghi, experts feel the rupee’s decline has more to do with the country’s fundamentals. In an interview on Bloomberg TV, Andrew Swan, managing director and head Asia equities at fund manager Blackrock said that the rupee will stay weak given the deficit issue. Slowing economy is giving the central bank little room to manoeuvre. In its report on India’s Balance of Payments (BoP) situation said that chronic problem in the BoP is likely to intensify which can push the currency to record levels of 60 against the dollar. The report, however, mentions that global stimulus can push the currency to the 54.50 levels along with a narrowing current account deficit, but this is likely to be only a brief respite. Nomura feels political gridlock and policy paralysis will keep investors away adding to the pressure on the currency. Though the country has attracted the highest level of inflows from foreign institutional investors on a year-to-date basis, the depreciating currency highlights the structural issue. Nomura feels there can be renewed depreciation pressure on the rupee with the rising risk of a sovereign credit rating downgrade.

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