20November2008

Rupee closed below 50 per Dollar first time
For the first time in history, Rupee broke the psychological barrier of 50 per Dollar. It has breached this barrier on 27th October intraday but closed at 49.945. There are couple of reason for this fall of Re. against $. Firstly, FII (Foreign Institutional Investors) are buying $ heavily. This must be because the FII are exiting indian stock market and investments from oil companies. The high demand for $ makes Re. weak against $. Another reason for this downfall is arbitrage opportunity developed in $-Re in offshore and domestic market (arbitrage is the state when there is different in pricing of an instrument in different market. In this situation one can make risk free profit. Arbitrage is rarely observed in evolved markets). There are Non-deliverable Forward (NDF) trading on INR in Dubai and Singapore (NDF can be explained as a forward contract where you agree to buy or sell INR on future date at current price. But at the end of the period you don't need to physically deliver INR, just need to pay the difference). $-Re. rate in this market is around 50.85-50.90, this prompted buying of Dollars from domestic market and selling in these market providing a clear arbitrage.
As was always known exporters and IT companies gain the most when Re weakens as their is in $. But this is not the case now. Major or all IT companies are hedged to their Fx exposure now a days. So they wont be able to make a gain out of this.
It is important to note that Re fell by 26.9% since beginning of 2008 and down by 27.36% from its year high of 39.265 on 15-Jan-08. RBI is trying its best by selling $ and lowering demand, as is clear in steep fall of $ reserve RBI. But it seems that this is not enough as Re is inching 51 per $ today!