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 said.
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.
The rupee is one of the worst performers among the emerging currencies, and the worst hit in Asia, losing over 18 percent during the year.
"The domestic economy was visibly slowing down due to higher interest rate regime and policy inaction. Inflation was not showing any sign of cooling down throughout the year, which had impacted the sentiments of foreign investors," Brahmbhatt of Alpari said.
Some experts are of the opinion that given the country's poor share in global trade, coupled with the near-double digit inflation, the present depreciation is in sync with the real effective exchange rate (REER) of the currency.
"If you see trade weight and inflation numbers, the rupee had been overvalued for a long time. So, this depreciation is in sync with the REER," a bank official said.
The REER is the weighted average of a currency relative to an index or basket of other major currencies adjusted for inflation.
In the meanwhile, there was a raging debate with respect to extent of the Reserve Bank's intervention to check the rupee fall.
Interestingly, while there was no formal word from the central bank, in more one than occasion, market players have suspected intervention of the central bank indirectly to check volatility.
The central bank has reportedly sold USD 1.8 billion in September-October and a higher USD 6 billion in November to stem the slide in the local currency.
"Given the resource availability with RBI, the steps taken are in the right direction. Allowing the rupee to move as per market dynamics is a better approach as our currency is partially convertible and forex reserves are not that big," Brahmbhatt said.
Even some of the steps taken up by the central bank to curb speculation and increase dollar flow are lauded by market players.
"The central bank has recently come up with norms like reduction of limit, banning rebooking of cancelled forward contracts, deregulation of NRE deposits, higher ECB limits, doubling of FII holding in infra debts will help in rising dollar flow into the country and check further depreciation," IDBI's Venkatesh said.
What's is in store for rupee is the million dollar question right now and no wonder, nobody is out there to guess the possible movement.
Still, experts believe the rupee will move up to 46-48 range in the second half of the new year as some of the major concerns of global economy and India's see reasonable solutions.
"The rupee should be around 51 to a dollar by March. Beyond that, global trade should revive and the pace of growth of the domestic economy should improve," Venkatesh said.
Brahmbhatt also sees better time for the rupee from the second half of 2012.
"In the second half, the rupee should be in the range of 46- 48 to the dollar," he said adding a lot will depend on fixing the European problem and the direction of domestic economy.
