2011, a disastrous year for the rupee

Mumbai: In a roller-coaster ride, the rupee plummeted to life-time low levels in 2011 due to a slew of factors such as unrelenting demand for the dollar, the worsening domestic economic scenario and sustained capital outflows.

The domestic currency started the year on a strong wicket and was trading at 44.76 to the dollar in January. In the second part of the year, there was panic reaction in the inter-bank foreign exchange market after cracks started appearing in the Eurozone.

Towards the end of the year, the rupee fell to its all-time low of to 54.30 on December 15, much to the worries of policy makers. On the last day of the year (December 30) the rupee closed 53.10 to the greenback, down over 18 percent from the first day of the year.

Traders attributed the sharp fall to investors rushing to buy dollars as there were no sign of easing in eurozone crisis. They said dollar`s increased appeal as a safe haven, especially in times of crisis, generated much demand.

The trouble for the local currency became intense when on worries of economic growth came to the fore along with fears of a higher government borrowings which is budgeted at Rs 4.17 trillion.

Broadly, the rupee fall could be seen in two time periods. First, it fell from 43-44 to 47-48 a dollar in the January-July period and then plunged to 48-54.30 in the August-December period, triggered by the US downgrade by S&P on August 5, which led to scramble for the dollar.

The fall was also precipitated by the poor foreign portfolio inflows during the year. The April-October period saw only USD922 million inflows compared to USD27 billion in the year-ago period.

"While the fall from 43-44 to 48 was due to external factors, especially sovereign debt crisis in the Eurozone, the steeper slide was due to local factors like the structural issues (higher fiscal and current account deficits) faced by the domestic economy," Alpari Financial Services chief executive Pramit Brahmbhatt told PTI.

However, the rupee slide is not a lone phenomenon.

Rather, it has happened across all emerging markets as investors globally seek safe haven options in dollar.

"Dollar scarcity was visible throughout the year. Due to Eurozone uncertainty, US banks cut their exposure to European banks. Even inter-bank lending by US banks was restricted, which squeezed dollar availability.

"In turn, the dollar rose against all major currencies, especially the euro," IDBI Bank treasury head NS Ventkatesh said, adding that the depreciation was the natural fall out.