Mumbai: The rupee slumped to a record low against the dollar on Wednesday as the global risk aversion added pressure on a currency already under fire from the country’s current account and fiscal deficits.
The rupee, the worst performing emerging market currency in Asia since 1 March, is facing further losses as India struggles with a slew of additional economic challenges, including sliding growth.
Investors are also showing little faith in the government’s ability to meet its fiscal targets and solve its economic challenges, critical stumbling blocks for a country that needs the capital to shore up its twin deficits.
Source: Bloomberg
The worries about India’s outlook are overwhelming the Reserve Bank of India’s ability to defend the local currency, despite repeated interventions and a rash of other measures targeting deposits and exporters.
“It is very hard for the central bank to turn the currency around,” said Robert Prior-Wandesforde, an economist for Credit Suisse in Singapore.
“Without doubt, the investors are looking for steps from the government in terms of structural reforms, be it in the form of news on goods and services tax or the direct tax code or some measures that might encourage infrastructure investments.”
The rupee fell to a record low of 54.52 to the dollar, well below its previous record low of 54.30 hit in December.
Analysts expect the rupee, which ended trade at 54.51, to remain under pressure, given the continued concerns that Greece may pull out of the euro zone and the challenges at home.
A Reuters poll on Tuesday showed analysts expect the rupee to hover near record lows against the dollar for the next month or so, despite already falling nearly 10% since its 2012 peak in February.
“Unfortunately for the rupee, this is not a great environment to run a current account deficit and thus be reliant on capital inflows from foreign lenders,” said Sean Callow, a senior currency strategist at Westpac Banking Corp in Sydney.
“I suspect only radical steps by RBI - or sudden action by foreign central banks and/or G-20 - will stop a push through 55 and quite possible higher,” he said, referring to the dollar/rupee exchange rate.
Analysts Blame the Budget
Many analysts blame the start of the rupee’s fall on the federal budget for fiscal 2013 unveiled in mid-March, which proposed a deficit target of 5.1% of gross domestic product (GDP) that generated market skepticism.
The government also included a controversial set of taxation proposals for foreign investors.
Capital flows into Indian debt and equities turned negative in April, with a net $926.8 million leaving the country, down from a peak of $7.2 billion in net purchases in February.
Mukherjee’s promise of austerity measures on Wednesday failed to convince investors, especially as policy making is expected to stall in the run-up to general elections in 2014.
“The government has been only talking about fiscal consolidation but there are no steps at all, nothing being done to reduce the fiscal deficit,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
The RBI thus faces a steep battle in defending the currency, even as a weaker rupee threatens to push up inflation, though traders say they do not rule out more aggressive actions.
“The RBI is aware of the situation. We have taken steps and will take further steps if necessary,” said RBI deputy governor H.R. Khan at the sidelines of a summit of South Asian Association for Regional Cooperation in Nepal.
Liquidity would be a concern, though the central bank is expected to step up bond purchases via open market operations should it sell dollars more aggressively in markets.
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Experts’ view
• Rohit Arora, fixed income strategist, Barclays Capital, Singapore
“The rupee will most likely remain weak in the short term as is the case with all Asian currencies due to global risk aversion. Asian FX has weakened by 0.8-0.9% on Wednesday and so has the Indian currency.
“A view on levels in the next quarter will depend on how the structural risks in euro zone and global growth pans out. For India, weak fundamentals are another worry. But this doesn’t mean that if the dollar weakens then the rupee won’t appreciate.”
• Kishor P. Ostwal, chairman, CMD Research, Mumbai
“Where the rupee goes will determine the stock market movement, and in the short term, the rupee only looks set to fall. “If the rupee breaks 54.5 (rupees to the dollar), then we should prepare for 56, and that will bring the Nifty down to 4,600 points.”
• Deepak Kundu, Dealer Fx and Rates, ING Vysya, Mumbai
“I think the rupee is likely to touch 56 to the dollar by June-end. As of now, the only support can come from the Reserve Bank of India. There is no dollar supply in the market and exporters are not selling.”
• Indranil Pan, chief economist, Kotak Mahindra Bank, Mumbai
“The stress on Indian currency deriving out of the worries from the global conditions have increased significantly. The issue now focuses squarely on capital flows and if a heightened risk aversion globally would significantly lead to a drying up of the capital flows.
“Significant firming of the dollar is also adding to the rupee depreciation pressures. Attempts by the RBI to contain rupee depreciation is only likely to worsen rupee liquidity conditions. A difficult scenario presently for the policy makers.”
• Ashtosh Raina, head of foreign currency trading, HDFC Bank, Mumbai
“The level of Rs55 to a dollar is very much possible. The RBI can intervene strongly. But, for the rupee, given the global environment, and the dollar strength, RBI can contain the fall, but not control it.”
• Radhika Rao, economist, Forecast Pte, Singapore
“Given the one-sided bias in the markets, there was little that the central bank could unilaterally do, especially as EUR/USD is tumbling fast and stark losses in the stock markets.
“USD/INR in unchartered territory, approach of 55.00 doesn’t seem too distant.”
