Mumbai: The rupee’s seeming freefall against the dollar has had the pundits divided over the reasons why the Indian currency has become Asia’s worst-performing currency this year.
Some experts and traders have said that the rupee’s decline can’t be seen in isolation, given the global concerns over the euro zone crisis and the flight to the perceived safe haven of the dollar. Others insist that, compared with the slump of 2008, domestic factors are more at play.
Then, the rupee had weakened because of global risk aversion, economists and bankers said. Now, although the stalemate in Europe has added to the rupee’s woes, it is up to the Indian government to do more to protect the Indian currency, even as the Reserve Bank of India (RBI) has fought to stem the decline, they said.
On Wednesday, the Indian currency ended at 56.00 to the dollar, down 1.1%, the third consecutive day on which it closed at a record low. Concerns over the European debt crisis added to pressures related to the domestic current account and fiscal deficits. It touched an all-time low of 56.22 in intra-day trade.
With the rupee continuing its decline against the dollar, there are growing calls for intervention. But Mint’s Joel Rebello says there’s no consensus about what such an intervention ought to entail.
Over the past three days, the Indian currency has lost 2.8% from 54.425 against the dollar, extending its loss this quarter to 9.2%, the worst performance among Asian currencies.
In 2008-09, though foreign investors pulled out and export credit was hard to get, domestic growth was still firm, D.K. Joshi, chief economist at rating agency Crisil Ltd, pointed out.
“This time our growth environment is much weaker, investment climate is dull and there is lack of clarity on policy. The European crisis has only added to this uncertainty, which means we are probably looking at a worse phase for the rupee,” Joshi said.
The rupee has fallen 12% against the dollar since February, but foreign institutional inflows into the domestic stock markets have remained positive at $6.1 billion. In 2008-09, foreign investors pulled out $6.7 billion from India, taking the rupee down 13%.
Sonal Varma, India economist at Nomura Financial Advisory and Securities India Pvt. Ltd, said the pace of the rupee’s depreciation picked up after March because of a lacklustre Union budget and as state election results did not favour the Congress party, further weakening the government at the Centre.
The Congress lost elections in three of the five states that went to the polls earlier this year and barely managed to hold on to one.
“Investors started losing confidence in March because there was no policy direction and state results were not encouraging. Fundamentally, nothing has changed since then and the government even delayed hiking fuel price hikes, which does not send the right signal to investors,” Varma said.
On Wednesday though oil marketing companies hiked petrol prices by up to Rs 7.50 a litre effective midnight, the first such increase since 4 November, to compensate for costlier crude imports on account of the rupee’s fall.
Bankers said RBI’s recent moves to support the rupee, such as ordering exporters to convert half of their foreign exchange earnings into rupees, have not worked.
“Market has gone thin on supplies because exporters are waiting to see signs of sustained RBI intervention before selling dollars. Nobody knows why the RBI is still waiting on the sidelines,” said a dealer with a private bank, requesting anonymity as he is not authorized to speak to the media. “Perhaps they think there is genuine dollar demand in the market and they don’t want to subsidize it or they want the environment to improve before stepping in and taking the rupee higher by Rs 4-5 like they did a few months ago.”
There were also calls for RBI to provide a separate window for oil companies buying dollars so such dollar demand can be taken out of the market, but this invoked no interest from the central bank.
In a report released on Tuesday, Dariusz Kowalczyk, senior economist at Credit Agricole SA, said that more than the foreign investors who were selling the rupee, it was the local companies and institutions that were pessimistic about the situation on the ground.
“We were struck by their degree of pessimism over the growth outlook, the quality of policymaking and the currency. As a result, corporates are trying to be short on the local currency... their unhedged foreign debt is exacerbating the situation as businesses will have to buy foreign exchange to meet their obligations,” Kowalczyk said.
Bankers deny that Indian companies have given up on their own currency. “There is no substance in these claims,” said Hitendra Dave, head, global markets India at Hongkong and Shanghai Banking Corp Ltd (HSBC).
“This talk is only because the rupee is weakening. The truth is companies buy dollars for imports or other payments they have. Problems in India are well-known and we can say that the price of the rupee has corrected to take into account those problems. Whether it has corrected enough, only time will tell,” Dave said.
But Dave, like Varma from Nomura, agrees that the government has more work to do to support the rupee. “It requires a joint effort from RBI and government but right now the majority of the policy action has to come from the fiscal side,” Dave said.
Varma said signals of the government’s intent to stem the rupee’s fall, such as fuel price hikes, were long-pending.
“The government can at least signal other measures. It doesn’t have to be big bang. But progress on issues like FDI (foreign direct investment) in multi-brand retail can go a long way to improve investor sentiment,” Varma said.
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