Indian Rupee Hits All-time Low Against Dollar

The Indian rupee has hit an all-time low against the US dollar. (Photo: Ravindra Boopathi)

MUMBAI, India—The Indian rupee hit a fresh all-time low against the US dollar on Wednesday, as risk averse global investors wary of India’s twin deficits drowned out central bank efforts to stem the currency’s slide.

The rupee hit 54.44 against the dollar, breaching its prior low of 54.39 set Dec. 15, according to FactSet data. The slide helped send the benchmark Sensex index down 1.8 percent on Wednesday.

Analysts said they expect the rupee to soften further, breaking 55 to the dollar, as Eurozone jitters dovetail with growing worries about India’s slowing growth and current account and fiscal deficits.

The Reserve Bank of India sold around US $20 billion between September and March to prop up the rupee, but India’s falling foreign exchange reserves limit the bank’s ability to intervene decisively, Abishek Goenka, chief executive of India Forex Advisors, said in a research note on Wednesday.

The central bank last week ordered exporters to convert half their local foreign exchange holdings into rupees, a drastic move that analysts said would ultimately have minimal impact on the currency.

“The current account deficit has been increasing since April 2011, with imports rising faster than exports and deficit over balance of payments, supporting the demand for the dollar,” Goenka said. “Poor IIP and WPI figures and outflow from the nation has created a path for the rupee weakness. The international factors are also adding to the weakness.”

The sliding rupee is fueling a vicious economic cycle, which a growing number of critics say can be broken only by better fiscal discipline and structural reform by New Delhi. Global economic uncertainty has added urgency to those calls for change, as economists say India has less of a buffer to deal with external shocks now than it did in 2008.

The falling currency makes imports—especially of oil—more costly, adding to inflation and worsening India’s deficits, which spooks already skittish global investors. That, in turn, decreases investment and makes it harder for the central bank to cut interest rates, worsening the growth outlook.

Hopes that India’s weak ruling Congress Party will be able to corral its restive coalition partners and push through reforms that could unlock the country’s growth potential and kick-start much-needed investment are fading.

In the policy vacuum, the central bank has borne the brunt of trying to stimulate growth, cool inflation and prop up the rupee—an impossible triad to manage with a single set of policy tools. India’s inflation—driven by food costs and supply-side bottlenecks—has proven resistant to 13 consecutive rate hikes. The cool investment climate has as much to do with corruption and changing tax and telecom policies that could cost foreign investors billions of dollars as it does with high interest rates.

“Structural reforms and greater commitment by the government towards fiscal discipline are key for ensuring sustained gains in the rupee,” said ING Vysya Bank economist Upasna Bhardwaj.

Finance Minister Pranab Mukherjee pledged on Wednesday to proceed with unspecified “austerity measures,” but was quick to blame external factors for India’s troubles.

“The international situation is difficult. Country after country is witnessing economic crisis,” he told India’s Parliament.

Mukherjee defended the government’s record, saying it had taken positive steps to boost food production and build food storage facilities, as well as support rural demand and drive manufacturing job growth.

“We should have to depend substantially on the strategy that our growth would come from domestic demand,” he said. “For that, we are stepping up a substantial amount of money in rural infrastructure, in rural sectors, in the social sectors.”

Indian financial news channel CNBC-TV18 offered a scathing assessment of his remarks.

“Living in denial for our Indian policymakers,” a CNBC-TV18 news anchor said after the speech. “Their policymaking seems to be fine to them, which the world doesn’t believe.”

2 Responses to Indian Rupee Hits All-time Low Against Dollar

  1. Prof.P.Madhu Sudana Rao

    Measures to overcome rupee fall
    Although the rupee has been on a downslide in relation to the dollar for quite some time, the extent of depreciation has been particularly striking recently. The home currency’s fall is mirrored by the sharp drop in the benchmark stock indices.
    A combination of domestic and global factors is behind the rupee’s fall. Further India’s Economic growth is slackening. The widening current account deficit and the critical reliance on short-term capital flows to bridge it are adding to the pressure on the rupee.
    Recent export figures have dashed hopes. The sharp demand contraction in the traditional export markets, the United States and Europe has begun to take a toll. A depreciating rupee makes India’s imports costlier.
    Many items, notably petroleum, have an inelastic demand. The import bill is bound to go up steeply. Moreover, the falling rupee has offset the recent declines in the prices of certain imported commodities. On the other side, exporters who normally stand to gain say that they did not quite expect the rupee to slide so precipitously.
    Anticipating a further decline, many exporters are holding on to their proceeds, while importers have been rushing to buy dollars to cover their imports. With the macroeconomic numbers unlikely to improve in the next few months if anything, they might worsen the rupee appears to be really up against it.
    The higher cost of imported inputs will cause an increase in their end prices, especially in the case of fuels. The size of forex reserves with RBI $306 billion is not large enough to defend the rupee in what promises to be a period of prolonged uncertainty and financial market volatility. Measures like higher interest debt flows to India corporate sector, Foreign Direct Investments in Multi brand retail and other sectors, would relieve the pressure on the rupee to some extent.

  2. I hate it….but as a lay man i dont care about it. Fact is ordinary Indians are more worried about the vast corruption leading to slow development etc. Hope Anna Hazare’s struggle will someday be successful. Jai hind!

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