Home / Politics / News /  Rupee should be allowed to find its own path, says survey

Mumbai: The Reserve Bank of India (RBI) should let the rupee find its level rather than try to force it to strengthen by selling dollars, economists and currency dealers told a survey.

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A 2 June corporate survey report by ING Vysya Bank Ltd found that a majority of the respondents expected the local currency to fall from the present level in the immediate future but strengthen rapidly by the end of fiscal 2013.

For the survey, conducted between 21 and 25 May, 400 respondents from 220 organizations were asked to comment on the rupee, gross domestic product and inflation.

Over 80% of them said they expected the rupee to weaken further, with over 50% expecting the currency to breach the 58-to-a-dollar mark and 15% expecting it to breach 60.

Despite the immediate pessimism, 65% of them expected the rupee to rise above 55 by the end of March, with 45% anticipating it would go above 52, the survey said.

“Our survey results and feedback from corporates indicate that most people are expecting the rupee to appreciate in the medium term, but it is short-term perceptions of a weaker rupee that are holding them back from selling (dollars)," said Phani Shankar, head of financial markets at ING Vysya Bank.

The rupee touched a record low of 56.51 a dollar on 31 May in intraday trade, but RBI sold dollars through banks and the currency strengthened. On Friday, the rupee closed at 55.54 a dollar after RBI intervened.

In the past two weeks, government and RBI officials have expressed concerns about the falling rupee and currency dealers see the central bank stepping into the market to protect the current level.

A forced appreciation of the currency has not been effective. RBI came out with a host of regulations in December and January to stop the rupee’s fall, banning banks from taking large positions in the currency market and stopping exporters and importers from speculating in the currency market.

The rupee strengthened from 54.30 on 15 December to 48 to a dollar by February. But after that, the decline has been steep. “Given the weak macroeconomic fundamentals, any sustained down move in spot has the risk of a bounceback, like seen from December to March. This also runs the risk of being seen as a good window for hedging imports or unwinding existing short positions," ING Vysya Bank wrote in its report.

“For any sustainable change in corporate hedges, it is important that the perception of a weakening currency should change. That’s more effectively achieved through a stable and mildly strengthening rupee rather than by a sharp appreciation," Shankar said.

Currency depreciation also leads to a drag on growth. To strengthen the currency, RBI will have to sell dollars, effectively removing an equivalent amount of rupee liquidity from the market.

To bring back the liquidity, RBI will have to buy back bonds from the secondary market, or cut banks’ cash reserve ratio.

“The corollary to this situation is that of crowding out of private investments as room for RBI on both these liquidity enhancing measures could get limited over time, while the high fiscal deficit pre-empts funds from the banking system. Thus, transmission of monetary policy action from RBI could also remain weak, thereby inhibiting investment demand," Indranil Pan, Kotak Mahindra Bank’s chief economist, wrote in a 31 May report.

ING Vysya’s survey shows that people are more pessimistic about the economy than the government.

“The current economic downturn has adversely affected the mood of India Inc. as 80% of the respondents indicated that they expect GDP (gross domestic product) growth at sub-7% level. The pessimism is reflected across all the sectors... This outcome clearly contrasts with the government’s and RBI’s estimate of 7.6% and 7.3%, respectively," the survey report said.

The rupee’s fall has added a new angle to the already widening fiscal and currency account deficits, calling for strategies to stop the slide.

Some argue that strategies won’t work at this juncture when the markets are driven by sentiments rather than fundamentals. A weakening rupee is, in fact, good for exports and RBI should not strengthen it forcefully as that would lead to a loss in competitive advantage.

“Indian exporters compete against Asian exporters and their currencies are also losing rapidly. If RBI strengthens rupee and those of Sri Lanka, Bangladesh, Pakistan, Singapore, Taiwan, etc., remain weak, Indian exporters instantly lose out in competitive advantage. Even for software exporters where there is no input cost, a weak rupee helps them to bring down product price and enhance their business," said Harihar Krishnamurthy, head of treasury at First Rand Bank.


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