Will the Rupee break 2008 lows?

Will the Rupee break 2008 lows?

On Friday, the rupee closed at 51.34 per dollar, weaker than Thursday’s close of 50.90. Moses Harding, head of global markets group at Indusind Bank said: “The chance of rupee visiting the historic low of 52.18 is high because of the inability of the Euro-zone to solve the problems quickly resulting (in) the dollar strength(ening)."

With Europe teetering on the edge of a monetary union break-up, investors are quickly liquidating other assets and buying US dollars and treasuries.

Emkay Research in a report said, “There is a high probability of rupee to depreciate to 52-53 as risk aversion will cause the dollar to strengthen."

Besides, local macroeconomic factors are also not favouring the rupee.

For one, a rising trade deficit is putting pressure on the rupee. India’s trade deficit, the difference between exports and imports, widened to $19.6 billion in October, the most in the last 17 years. This is only expected to increase further due to an escalating import bill and a decline in exports.

Clickto read other Mint analysis

Secondly, foreign institutional flows have been subdued so far this year and likely to remain so. The policy paralysis in the government, weak company earnings and a plethora of scams are no incentives to draw foreign investors to India. That will put further pressure on the rupee like in financial year 2009 when the currency fell 22% after FIIs withdrew $9.95 billion.

Thirdly, there is a high probability that India’s growth will fall below 7% in FY12 after several economists revised their forecast downwards in the past few weeks. IndusInd’s Harding fears that, “Inflation woes and fiscal slippages may lead to a sovereign downgrade," which will further weigh on the rupee.

For now, there seems no respite for importers who are running for cover. Moreover, the Reserve Bank of India has also said that it would be careful from intervening in the forex market unless there is excess volatility.