Rupee falls 9% in 2015; ends near record closing low

Reuters: The rupee fell 9% in 2015 and ended the year near a record low on Thursday as higher imports, growing private sector credit and falling export earnings weighed on the currency throughout the year.

Currency dealers said the market was still pricing in the impact of the Central Bank’s decision to raise statutory reserve ratio (SRR) to 7.5% with effect from 16 January in its monetary policy meeting held on Wednesday.

The rupee hit a record low of 144.25 per dollar in intraday trade on Wednesday. It closed at 144.10/20 on Thursday, little changed from its record closing low of 144.20/30 hit on Wednesday. “It is a razor-thin market. The lowest deal was done at 144.20. We need to wait for the impact of the SRR hike, which will mop up Rs. 60 billion liquidity from the market and tighten the money market,” said a currency dealer.

Central Bank Governor Arjuna Mahendran said the rupee would stabilise when exports start to pick up next year.

“A lot of the bad news in terms of dollar strength has already been priced in. So the dollar is giving up some of its gains in recent days. Even the Sri Lankan rupee seems to be stabilising around its current level,” Mahendran told reporters in Colombo. However, uncertainty will prevail if the US Federal Reserve goes for another rate hike in March, Mahendran said. “That means the interest differential between the dollar and other currencies will widen and create further volatility,” he added.

The currency has fallen 6.5% since the central bank allowed a free float of the rupee on 4 September, and is expected to weaken further in 2016 due to lower reserves and higher imports, currency dealers say.

Economists say the Government’s loose monetary and fiscal policies have contributed to the steep fall, with private sector credit recording 26.3% growth in October year on year, compared to 13.9% in March.

Commercial banks parked Rs. 81.8 billion ($ 567.46 million) of surplus liquidity on Thursday using the central bank’s deposit facility at 6%, while they borrowed Rs. 135 million using the Central Bank’s lending facility at 7.5%, official data showed.