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Rediff.com  » Business » Rupee is likely to touch 56/$ soon

Rupee is likely to touch 56/$ soon

Last updated on: May 18, 2012 14:08 IST

Rupee symbolThe rupee slumped to an all-time low on Wednesday amid weak macroeconomic fundamentals and global uncertainty.

The Reserve Bank of India's intervention was not enough to lift the rupee, the worst performing Asian currency since March.

It touched all-time low levels in early trade when the RBI sold dollars to arrest the fall but it fell further on the back of strong dollar demand by importers.

According to Bloomberg data, the rupee closed at 54.49 a dollar, 1.3 per cent lower than Tuesday's close after having touched a lifetime low of 54.52 a dollar.

The previous all time low (intra-day) was 54.30 a dollar attained on December 15.

In this month alone, the rupee has depreciated 3.33 per cent against the dollar.

We spoke to Abhijit Kumar Dutta, Senior News Editor (Business), The Telegraph, for his views on the issue.


Not a bolt from the blue

The rupee downslide was on expected lines. It was not a bolt from the blue. Though the currency touching 54.52 a dollar was statistically and economically very important.

This descent of the Indian currency has been hitting the headlines for quite some time now. In fact, it has become a global phenomenon for discussion.

Incidentally, the Indian rupee is not the only currency to slide against the dollar. The Brazilian real, South African rand, Indonesian rupiah and South Korean won have all weakened. India's case is more serious because of the trade and current account deficits.

For 2011/12, the trade deficit was estimated at $184.92 billion -- nearly 56 per cent higher than the previous year's $118.63 billion.

Further fall likely

Economists and analysts across the world are of the opinion that rupee is likely to touch 56 in recent future.

While commenting on the dire state of the Indian currency of late, a recent Citibank report predicted it could sink to 60/USD soon.

Hence, things don't look too rosy at the moment.

Importers are the worst hit

When rupee falls, the worst sufferers are the importers. They pay more and get less. Oil imports are where a weak rupee hurts India the most. Oil accounted for nearly 32 per cent of total imports ($488.6 billion) in 2011/12.

A weak rupee increases the import bill and cancels out the benefit of any decline in global crude prices.

In its April 17 monetary policy, RBI said that given the vulnerabilities arising from the fiscal and current account deficits, raising the prices of petroleum products to reflect their true production cost is essential for macroeconomic stability.

Only exporters, IT companies are to gain

Only gainers from this situation are exporters and information technology companies. Indian infotech exporters stand to benefit as a rupee fall translates into higher revenues. About 70 per cent of IT companies' revenues come from the US, a sizable portion of which is billed in dollars.

According to IT analysts, sharp depreciation of rupee will improve the margins by at least 30-50 basis points.

FIIs are losing faith in the Indian economy

The Indian markets have been declining steadily for the past few months. Every fall in Sensex is raising investment doubt among the foreign institutional investors. For India, the latter are the prime foreign exchange earners.

Less investment by FIIs means a crunch in the foreign exchange, which in turn paves the way for weaker markets and a weaker economy.

We, therefore, are moving in a vicious circle and at the moment cannot see any silver lining.

Steps that are needed

  • First and foremost, India's subsidy bill has to be curbed. Given the federal structure of India and its coalition government, it is not an easy proposition.
  • Expenditure has to be curtailed effectively.
  • Non-capital forming investment has to be minimised as much as possible.

Matters of concern

The United Progressive Alliance government has not been able to implement the foreign direct investment in multi-brand retail. FDI could have been raised to 49 per cent if insurance bill were passed but that too is not happening.

There is no denying the fact that the coalition government has its own dynamics and one has to abide by it.

Thankfully, Finance Minister Pranab Mukherjee has delayed the introduction of the controversial General Anti-Avoidance Rule that seeks to empower taxmen to clamp down on deals and income if they believe that these were structured in a particular way only to avoid paying taxes.

However, a delay in implementing GAAR has not actually taken the full sting of it out.

Because of all these factors, foreign investors are slowly losing interest in the Indian economy and that does not augur well for us.

Given the fact that India is going to have another coalition government in the next Lok Sabha election as well, the government has to come up with a common 'workable' agenda for the betterment of the economy.

Unless that happens, future is going to be pretty critical for the economy and our dream to see India as a superpower will take very long to materialise.

As told to Indrani Roy

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