Views | Tough months ahead for the rupee
Views | Tough months ahead for the rupee
Newspaper reports on the latest balance of payments data released by the Reserve Bank of India last week missed a key point: capital inflows in the last three months of 2011 were inadequate to fund the $19.6 billion current account deficit. This balance of payments deficit forced the Indian central bank to dip into its foreign exchange reserves to fund the gap, a sign of economic stress.
Capital inflows improved in the first three months of 2012, especially money investment by foreigners in the stock market. The first quarter of the current calendar year was the best in history as far as portfolio investments go. Regulatory actions such as freeing interest rates on some types of non-resident deposits as well as RBI intervention to defend the rupee helped the Indian currency strengthen. But the prognosis ahead does not look good, given the fact that the US dollar is expected to strengthen in the months ahead while the Indian current account is expected to deteriorate. One must also remember that deleveraging, especially in the European financial sector, will weigh down on debt inflows into India.
But the wide current account gap, stagnant reserves and growing short-term liabilities does limit the ability of the RBI to intervene to support a weak rupee (see an earlier analysis of this problem here). Some critics argue that the policy decision to let the exchange rate be determined by the market has ensured that the Indian central bank has not had the opportunity to boost reserves.
Analysts expect the rupee to remain weak this year. “On our forecast, the CA (current account) deficit of 3.9% of GDP in FY13 is beyond the RBI’s comfort level. This, along with our expectations of a stronger dollar, sets the stage for INR to weaken," wrote CLSA economist in a research note on Monday.
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