Stock - Indian Rupee
By allowing trade transactions to be done in rupees, India's central bank hopes to shore up its dollar holdings. Will that stem the rupee decline? Image Credit: Bloomberg

Dubai: The Indian rupee continues to slip closer to 21.70/21.75 against the dirham even as the government moves to save up on dollars and halt the rupee’s slide. But FX analysts say that the rupee’s slide should not be seen in isolation.

“These days, it’s all about dollar’s strength – the euro has dropped to a 20-year low against it after shedding 1.29 per cent in a day,” said an analyst. “If this sort of trend continues, euro could drop all the way down to 0.95 to $1.

“With that kind of dollar strength, the rupee’s decline has been more gradual and we should see it go over 21.70.”

On Monday (July 11), the Reserve Bank of India said it would allow more trade transactions to be settled in the rupee. What this means is that India will be using less of its dollar reserves to pay for imports. For instance, India’s imports of oil from Russia is settled in rubles, and saves India quite a substantial dollar-linked fuel bill.

Earlier, the Indian government hiked gold import duty by 5 per cent to 15 per cent from July 1, based on the thinking that if this manages to reduces Indians’ consumption of the metal, it will help save on gold imports, which are settled in dollars.

“So far, these moves have not had any bearing on the rupee’s drop,” said Neelesh Gopalan, Senior Treasury Analyst at LuLu Exchange. “The rupee is now down 7.8 per cent from its highest point on January 12 to today’s rate.”

On January 12, the rupee was holding firm at 20.10 (73.81 in dollar terms), but by May 9, it had dropped to 21 and over. The question now is when will it get to 22 against the dollar. Early on Tuesday (July 12), the rupee is at 21.65/21.67.