That is why RBI is not supporting the Rupee

The Rupee on Thursday breached the 49-mark against the US dollar and fell by 52 paise in early trade following increased capital outflow by foreign funds due to melting stock markets.

At the Interbank Foreign Exchange market, the Indian currency, which was down by 43 paise at 48.52/53 on Wednesday, plunged further by 52 paise to 49.04 against the greenback due to heavy dollar demand from importers and capital outflows.

House View:We have been predicting RBI intervetion in steadying the rupee, but it seems that RBI is thinking differently on intervention. With the fall in global stock markets Indian Markets are still holding profits for the FIIs. They are offloading their holdings to get whatever they can get from the market. Due to selling pressure their is demand for dollars as the money has to be repatriated in dollars. Now, as we believe, if RBI intervenes to prop the $ it will mean that the FIIs will have bigger profits due to increase in the price of $.Thus RBI loses money by supporting the Rupee and this loss ends up as profit for FIIs who in either case are going to sell.
RBI by not intervening in the $ rupee trade is trying to make FII selling unattractive, futher as oil prices are rapidly going down, their no tearing hurry to intervene.We expect that once this frenzy ends, RBI will step in to prop the rupee to maximise the impact of falling oil prices. This wil be a neccessity as the government is facing elections in 4 states in Nov./Dec. and government will reduce oil prices by 2-3 rupees to lower prices and reduce inflation as an populist measure. This is only possible if oil falls to below $50 per barrel( seems unlikely)or the rupee comes up to 44 per $, possible after present sellout and RBI support.
Disclosures: No personal holdings
Part of the Dream Weave Walk Network 1998-2010