Higher FII debt limit only augments rupee fall: Kotak Securities
13 Jun 2013
Raising debt investment limit for foreign institutional investors (FIIs) can only be a short-term measure and not an effective solution to the rupee's problems, according to brokerage firm Kotak Securities.
In its note to clients issued prior to the government's announcement raising investment limit for FIIs in government bonds by $5 billion to $30 billion, Kotak Securities pointed out that FIIs have net sold government bonds worth over Rs15,000 crore in the last three weeks.
"The exodus of foreign capital from debt markets has accelerated the Rupee's plunge over the past few days," Kotak said in the note.
"This exposes the inefficacy of measures taken by India to shore up its current account deficit problems - higher limits for overseas investments in Indian debt. The government has steadily increased debt limits to attract more foreign flows but this has backfired," said the Kotak note.
The rupee pared a large part of its losses on Thursday, helped by dollar sales from a corporate and exporters, but the markets were disappointed over the lack of any specific measures by the government to prevent further falls.
The rupee was supported at higher levels by exporter sale of dollar, dealers said.
The rupee closed at 57.98/99 against the dollar, off the day's low of 58.56 but still weaker than Wednesday's close of 57.79/80.
Finance minister P Chidambaram's attempt to win back market confidence by pledging new reform measures, including higher FDI limit and talking up the economy disappointed investors.
The dollar's decline against major currencies also helped the rupee's recovery by pushing the offshore non-deliverable forward rates down. The index of the dollar against six majors was down 0.26 per cent.
In the offshore market, the one-month contract was at 58.35 while the three-month was at 58.99.
In the currency futures market, the near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 58.10 with a total traded volume of $7.19 billion.
Domestic shares also fell for a third consecutive session to close at their lowest level since 17 April.
