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Rupee Woes Point Towards A Grim Future

Posted in Finance Articles, Total Reads: 1970 , Published on June 15, 2012

If you read the headlines in any financial newspaper today, you won’t miss out on the Euro crisis. No one can say where the fate of Greece lies and what that would evidently mean for the Euro. But the answers to these global issues can be found if we take a look at our own backyard.

Yes, the once stable Rupee that symbolized India’s resilience to the 2008 crisis is failing to hold its ground today. On 15th June 2012, is hovering around 55 rupee to dollar mark and continues to rise. And it seems like the Rupee will fall further, thus affecting exporters, importers and market participants. Even your everyday international traveler is affected making holidays abroad more expensive.

However, the depreciating Rupee more importantly signifies that India has a high current account deficit which needs to be addressed. Data published for the second quarter showed the trade deficit widened to US$ 43.9 billion as compared to US$ 37.0 billion during the corresponding quarter last year and financial account surplus moderated in Q2 of 2011-12 primarily on account of outflow of portfolio investment. In simpler terms, India needs to find ways to reduce imports or make arrangements for importing from countries at better prices. Also, because of the high current account deficit, India needs large capital inflows to finance the same. In today’s global environment, we have to look beyond volatile capital flows to support the rupee.

Another factor that is contributing to the Rupee’s depreciation is the lack of stability in global markets especially the U.S and Euro. The U.S dollar has gained strength because of risk aversion. However the Euro depreciated as a result of the possibility of Greece leaving the EU and setting off contagion risk. Thus the Euro (currency) had to bear the brunt with market participants seen selling the Euro and buying Dollars. A strengthened dollar weakened the Rupee.

One of the most notable contributors to the falling Rupee is FIIs withdrawing from the domestic economy. The pessimistic view of FIIs regarding India supported by more gloomy data i.e. WPI rising to 7.23% in April 2012 from 6.89% in March 2012, which was primarily led by food products and non food manufactured product inflation. Another indicator is CPI based inflation which stood at 7.9% in urban areas. Also the global crisis is pushing FII flows towards safer assets or markets, of which India seems to be neither.

So now that the Indian currency is at its all time low, what are the Government and the Reserve Bank of India doing, one may ask. The RBI has been intervening in the currency markets via nationalized banks, however even that has failed to seed results. Among its many moves, recent circulars published by RBI are aimed at reducing Rupee volatility.

Among them is the requirement that 50% of the balances in the Exchange Earner’s Foreign Currency (EEFC) Account are to be converted forthwith into rupee balances and credited to the rupee accounts. Another circular on was on Interest Rates on Deposits held in FCNR(B) Accounts. The Government has also claimed that it will bring out austerity measures for India. But how, when and what will be included in this plan is a case in question.

This article has been authored by Erica Fernandes from SIMSR.

Image courtesy of FreeDigitalPhotos.net

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