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Fundamentals weigh on rupee in 2012, no respite seen in 2013

Current account deficit, high expenditure have kept fiscal deficit in the danger zone, pressuring the rupee further
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First Published: Mon, Dec 24 2012. 10 33 PM IST
The Indian currency has lost 3.46% against the dollar in 2012. Photo: Priyanka Parashar/Mint
The Indian currency has lost 3.46% against the dollar in 2012. Photo: Priyanka Parashar/Mint
Updated: Mon, Dec 24 2012. 10 35 PM IST
Mumbai: This year has been a strange one for the rupee. The Indian currency started 2012 strongly, rising in the first two months on the back of rising dollar inflows from non-resident Indians (NRIs) after the Reserve Bank of India (RBI) allowed banks to fix their own non-resident (external), or NRE, rupee deposit rates.
The rupee rebounded from 53.07 to a dollar at the end of 2011 to 48.70 in early February as inflows of the US currency surged after banks offered non-residents rates on par with local depositors.
Large banks such as State Bank of India (SBI), HDFC Bank Ltd and ICICI Bank Ltd saw a rapid increase in NRE deposit inflows early in 2012, which not only stemmed the depreciation of the local currency but also lifted it to multi-week highs.
SBI, for example, received more than Rs.5,400 crore in NRI deposits between January and March 2012, which was equal to the amount the bank had collected between April and December, managing director A. Krishna Kumar said in an interview in March.
Then came the slide. The high current account and fiscal deficits weighed on the rupee throughout the year, dragging it down to an all-time low of 57.15 per dollar in June.
So far this year, the rupee is among the three worst-performing currencies in Asia, only doing better than the Indonesian rupiah and the Japanese yen.
The Indian currency has lost 3.46% against the dollar in 2012. The yen has dropped 8.93% while the rupiah has lost 7.42% against the dollar, Bloomberg data show.
India’s current account deficit, which includes trade flows and external remittances in fiscal 2012-13, could remain as high as it was in 2011-12—at 4.2% of gross domestic product (GDP), Sonal Varma, India economist at Nomura Financial Advisory and Securities India Pvt. Ltd, said in a note earlier this month.
India recorded a trade deficit of $19.3 billion in November, down from $21 billion in October, largely because of a fall in gold imports.
Exports fell 4% year-on-year to $22.3 billion largely because of slower global growth.
Slowing exports and the continuing high imports of commodities such as oil will continue to pressure the rupee in 2013 as well, bankers said.
Besides the current account deficit, high government expenditure has also kept India’s fiscal deficit in the danger zone, pressuring the rupee further.
In 2011-12, India recorded a fiscal deficit of 5.7% of GDP and so far finance ministry estimates point to this being 5.3%, higher than the budget estimate of 5.1%, while RBI expects the deficit to be 5.5%.
Local fundamentals were the main reason for the rupee’s weakness and these would continue to be a drag on the currency in the new year as well, said Ashish Vaidya, head of fixed income, currency and commodity trading at UBS AG, a Swiss bank.
“Currently, the bias is still with the rupee weakening because the domestic problems won’t go away very soon, and with oil prices remaining at elevated levels and major export markets like the US, Europe and Japan also not doing well, it looks like the current account deficit will remain wide,” Vaidya said.
The rupee’s weakness in 2012 was in spite of local equity markets receiving inflows worth $23.35 billion in 2012 after a dull 2011 in which foreign institutional investors pulled out $512 million from the local markets.
However, bankers said the rupee was unlikely to change course in 2013 even if inflows continue to be as strong as in 2012 because foreign exchange is likely to be spent in funding the country’s deficit.
Vivek Rajpal, India fixed income strategist at Nomura, expects the rupee to trade at 54-56 per dollar in the first few months of the new year.
“Till these flows continue to be strong, the rupee can be expected to be still. However, as soon as these flows stop, the rupee could weaken very rapidly,” Rajpal said. Nomura expects the Indian currency to end 2013 at around 59 per dollar.
On Monday, the rupee ended at 54.95 to a dollar, up 0.2% from Friday’s close of 55.07. It touched an intra-day low of 55.21.
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First Published: Mon, Dec 24 2012. 10 33 PM IST
More Topics: rupee | 2012 | deficits | dollar inflows |