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Rupee depreciates 9.3% against dollar

Riding on the expectation of its full convertibility, the Indian rupee received a severe setback in its value, hitting an all-time low in the year 1997 following the emergence of certain fundamental factors.

The massive payment of government foreign debts, drying up of increased flow of foreign investment, slowdown of external commercial borrowings by the corporates, fall in export earnings and the political uncertainties at the Centre resulted in a mismatch position of demand and supply in the foreign exchange market, forcing the rupee to take a sharp dip against major world currencies.

It fell by over 9.3 per cent at Rs 39.20-22 a dollar and by 6 per cent against the British pound to Rs 64.95 during the year. However, it gained modestly by 5.93 and 2.64 per cent against the German mark and Japanese yen during the year. It closes at Rs 21.88 and Rs 30.13 (per 100) against the mark and yen respectively.

Analysts said that the rupee's fall was exaggerated during the last couple of months owing to the confusing policy signals from the Reserve Bank of India. The currency was nearly stable between the year beginning level of Rs 35.84 and Rs 35.70 per US dollar till mid-August.

But a statement made by RBI Deputy Governor Dr Y V Reddy on August 15 at the foreign exchange dealers conference at Goa that the rupee was overvalued by 14 per cent, gave a blow to the currency which became vulnerable in the growing volatile market.

This was further aided by the conflicting statements made by the finance ministry as well as the new RBI Governor Dr Bimal Jalan and the currency saw its all-time bottom at Rs 39.93 per dollar on December 16.

Reacting to the sudden crash of the rupee, Jalan observed that the level at Rs 39.50 was reasonable in contrast to his predecessor Dr C Rangarajan's statement that the level of Rs 37.50 was comfortable.

According to bankers, the rupee had managed to defy both economic fundamentals and political uncertainty for most part of the year.

This could be established from the fact that the currency was virtually stable in the first half of the year despite a close of US $1.1 billion Indian Development Bond redemptions out of the country and sudden withdrawal of Congress support to the H D Deve Gowda government on March 31.

During the year, the RBI made a debt repayment of US dollar 700 million to IMF and US $3 billion towards FCNR(A) scheme repayment. In fact, the currency gained some grounds in the second and early third quarters of the year when it moved up to Rs 35.70 per dollar from Rs 36 in March. The unexpected strength of the rupee was mainly due to buoyant investment flows as the country's trade deficit was more than compensated by the capital flows.

But the bullish sentiment of the currency did not last long as the authorities suddenly felt that it was overvalued and started making public statements. Prime Minister I K Gujral said that the RBI and the finance ministry were working on fixing up a band within which the rupee would be allowed to move freely.

This, coupled with the RBI's reluctance to intervene in support of the rupee, saw the currency breaching through the psychological level of Rs 38 per dollar and touch a low of Rs 38.85 on November 28.

Later, the currency was allowed a free fall to hit an all-time low of Rs 39.93 which provoked the RBI to take some stringent measures such as hiking the cash reserve ratio by 5 per cent to 10 per cent to mop up extra liquidity from the market and banning the booking of forward contracts for non-trade transactions.

The measures brought back the currency to a stable groove of Rs 39.20 to Rs 39.40 per dollar in the last 10 days of the year with comfortable foreign exchange reserves position of US $24 billion.

This in turn encouraged the RBI to withdraw the stringent measures taken on December 17 and relaxed measures on export credit interest rates. The rupee officially closed the year at Rs 39.20-22 per dollar.

UNI