Rupee Remains Volatile Despite RBI Intervention While India's Industrial Production Shows Surprising Decline

Despite RBI's desperate efforts to prop up the rupee, it declined by 18 paise to reach 53.60 against the dollar in the late morning trade on Friday. However, rupee stabilized in the later sessions at 53.54/55 before closing at 53.45.

The rupee touched record low due to strong demand for American currency from importers and banks leading to speculations of further intervention from RBI.

RBI, worried by the steep fall in the rupee's value against the dollar had been interfering in the past week. RBI on Thursday had asked the exporters to convert 50 percent of their foreign earnings in the Exchange Earner's Foreign Currency (EEFC) account to rupees.

However, the Indian economy's weak outlook, trade deficit, concerns in foreign investors about the economic reforms along with a strong dollar in overseas market is proving fatal to the rupee. Industry experts believe that even RBI interventions cannot hold the rupee up for a longer term.

Foreigners are looking at the trade deficit rather than the possibility of rate cuts. We see no major appreciation for the rupee, Reuters reported quoting Paresh Nayar, head of fixed income and forex trading at First Rand Bank in Mumbai.

Moreover, experts express their concerns over the continuing volatility of rupee as the RBI has already taken most of the measures to arrest the fall of the rupee - from selling of dollars to controlling the demand and supply in the system.

RBI on the first day gave incentives to leave supplies and lack demand. Now, they have taken the stick to forcefully lead the supplies and lack the demand. So, demand-supply control has been taken. In addition to that they have been selling dollars aggressively in the market despite rupee liquidity increase in the system, said Moses Harding of Indusind Bank said in an interview with CNBC-TV18.

India's Industrial Production Drops

India's industrial production surprisingly declined by 3.5 percent in March, for the first time in five months prompting the industry to seek cuts in interest rates.

A statement released by Indian Central Statistical Office at New Delhi showed that manufacturing declined 4.4 percent in March from a year earlier after a 3.9 percent advance in February.

On an annual basis, the index grew by a just 2.8 percent as against 8.2 percent growth in the 2010-2011 fiscal year. Mining fell 1.3 percent, compared to a 2.7 percent increase in the previous month. Capital goods segment took the maximum hit as it plummeted by 21.3 percent in March, 2012 when compared to a 14.5 percent. Electricity output rose 2.7 percent.

The apex industry bodies on Friday sought immediate government intervention to fast track reforms.

Growth does not seem to have bottomed out, and unless, the Government acts immediately, FICCI does not expect an improvement in manufacturing until the second half of this fiscal when the base effect would be favorable and the Central Bank's rate cut will translate into a positive impact, Hindu Business Line reported ICCI President, Mr R V Kanoria, as saying.

However, the government indicated that it will take some more time for interest rates to come down but it would intervene to support critical sectors. The IIP figures are disappointing... Domestic investment recovery remains frail. It will take some more time for interest cost to come down, Indian Finance Minister Pranab Mukherjee said, according to a PTI report.

Meanwhile, Commerce and Industry Minister Anand Sharma said that after meeting exporters next week, the government would intervene in the sectors which require support, reported PTI.