Rupee’s Uncertain Future
Here are 10 main reasons which experts feel are responsible for the Indian rupee — which has depreciated as much as 16 percent this year — to touch new lows each passing day: -Widening Current Account Deficit: This is resulting in creating more actual as well as speculative demand for the dollar and other convertible currencies. -Policy Inaction: Perception of lack of clarity on policy front is also fanning speculative demand wherein the Reserve Bank of India (RBI) on one day said it will tighten liquidity and on yet another said it will inject $1 billion in the market. -Low Forex Reserves: India’s foreign exchange (Forex) reserves are enough to cover imports of seven month only. The forex reserves have declined in the recent months. Due to low reserves, the RBI can’t intervene aggressively in the currency markets. -Economic Growth Slowdown: India’s gross domestic product (GDP) growth fell to a decade low of 5 percent in 2012-13. The situation is unlikely to improve much this year. Foreign investors are pulling money out of the Indian markets due to slow growth. -Dependence on Foreign money: India’s current account deficit was financed by foreign money for the last many years. Withdrawal of money by overseas investors is leading to the weakness in the rupee. -Recovery in the US: The slow but steady recovery in the US is making the greenback stronger against other currencies. -Stimulus Withdrawal: Indications that the US may withdraw or ease the fiscal stimulus package that has been on since a few years ago to tide over the economic crisis there, could potentially put the brakes on funds for developing economies. -Capital Controls: The decision by the Reserve Bank and the government to impose temporary restrictions on capital flows has not gone down well with the markets, as it will not only discourage Indian companies from investing abroad, but also foreign firms from pumping money into India. -Trends in other markets: The rupee is also following the trend seen in the currencies of other emerging economies such as Brazil, Indonesia, Russia and South Africa. -Speculative Trading: Speculative trading in the currency markets is putting further pressure on the Indian rupee.
As the Indian rupee slipped for the fifth straight session Thursday to below the psychological level of 65 against a dollar, the Indian government tried to calm the markets saying it is considering more steps for the currency’s stability. The partially-convertible rupee slumped to a new record low of 65.56 against a dollar at the inter-bank foreign exchange market in Mumbai, surpassing its previous record low of 64.54 touched Wednesday. The currency recovered in the late trading and ended the day at 64.55 against a dollar, 44 paise weaker than its previous day’s close at 64.11. Finance Minister P. Chidambaram called for calm in the currency markets, saying there was no reason for such unwarranted pessimism and stability will soon return in the markets. ”There is no cause for panic … We are confident that the stability will return to the markets,” Chidambaram said at a media conference in New Delhi. The finance minister said volatility in the currency market was unacceptable and the government was taking measures to improve the situation. Chidambaram said rupee is undervalued and has overshot its reasonable limit. However, he said the government was not targeting any particular exchange rate for rupee. ”We are not targeting any particular level for the currency. We want a stable currency … rupee today is undervalued and has overshot,” he said. The Indian currency was battered, tracing weakness in major Asian currencies after the US Federal Reserve indicated that it would start tapering stimulus soon and as early as next month. Scaling back of stimulus would lead to further outflows of money from the capital markets putting further pressure on the currency. Currencies of other emerging markets, including Indonesia, Malaysia and Thailand also hit multi-year lows on the US Federal Reserve move. The Indian currency remains under pressure despite interventions from the central bank and the government to prop up the rupee. The Reserve Bank of India (RBI) has taken a slew of measures in the recent weeks to bolster the currency. The central bank Tuesday announced measures to tighten cash conditions and support longer-dated debt. The RBI has also simplified rules to attract money from Non-Resident Indians (NRIs) and portfolio investments like equities and debts.