rediff.com

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News 
Rediff.com  » Business » Why rupee will continue to remain weak

Why rupee will continue to remain weak

Last updated on: August 08, 2013 15:14 IST

Why rupee will continue to remain weak

     Next

Next
Rafael Nam Himank Sharma and Carolyn Cohn in Mumbai/London

As India's rupee hits record lows, some investors see it headed towards the mid-60s against the dollar, a reflection of weak economic fundamentals and expectations the government will struggle to implement meaningful measures to reverse capital outflows.

Domestic forwards markets, which reflect market expectations, see the rupee trading at around 65 to the dollar in a year, while offshore forward markets see it at 66.

Pessimism remains even as the government is widely expected to announce steps soon to encourage more foreign inflows, including potentially raising debt abroad, after the Reserve Bank of India's steps to drain cash from the financial system failed to prop up the currency.

Click NEXT to read further. . .


Image: A private money trader counts Indian Rupee currency notes at a shop in Mumbai.
Photographs: Vivek Prakash/Reuters

     Next

Why rupee will continue to remain weak

Prev     Next
Prev

Next

"We're very worried about the situation in India," said Walter Rossini, who manages the 130 million euro ($173 million) Gestielle Obiettivo India Fund in Milan.

"There's no fast fix to this situation. Probably we will see a turnaround of the economic cycle in a few quarters but rupee volatility will stay for longer.

"I don't see a strong case for it coming back to the average level of last year," he said.

The rupee hit a record low of 61.80 on Tuesday, marking a 10 per cent fall so far this year -- the worst performer in emerging Asia in currencies tracked by Reuters.

Over two years, it is down 26 per cent.

A record high current account deficit at 4.8 percent of gross domestic product has made India particularly vulnerable in an emerging markets sell-off sparked by anticipation the US Federal Reserve will soon wind down its ultra-loose monetary policy.

Click NEXT to read further. . .


Image: A man sits next to a computer screen showing the Indian rupee currency rates inside a private money exchange office in New Delhi.
Photographs: Adnan Abidi/Reuters

Prev     Next

Why rupee will continue to remain weak

Prev     Next
Prev

Next

Plenty of challenges

One of the first tasks confronting former International Monetary Fund chief economist Raghuram Rajan, who takes over at the helm of the central bank on September 5, will be whether to continue the RBI's liquidity tightening steps, which have failed to stem the decline but have pushed up short-term borrowing costs, adding to pressure on the already cooling economy.

In the meantime, New Delhi is widely expected to announce measures such as raising money from Indians abroad, but emergency steps are likely to prove insufficient unless India tackles fundamental and years-old problems that deter more robust inflows from corporations and other long-term investors.

Click NEXT to read further. . .


Image: A man walks past a board advertising US dollars at a money exchange shop in Colombo.
Photographs: Dinuka Liyanawatte/Reuters

Prev     Next

Why rupee will continue to remain weak

Prev     Next
Prev

Next

Those problems include heavy dependence on oil and gold imports, high inflation and political and bureaucratic gridlock that deter capital investment.

The task facing Rajan and Finance Minister P Chidambaram is complicated by the ruling coalition's weakness ahead of general elections by next May, in a global investor environment that no longer favours emerging markets.

"At the end of the day, it's a political issue that's really been holding back India to a large extent. Even with the right policies, if minority parties don't support reforms, it's going to make it very difficult for them to move forward," said Rajiv Biswas, economist at IHS Global Insights in Singapore.

In his current role as chief economic adviser, Rajan has suggested raising money from Indians abroad or easing overseas borrowing norms -- steps that would be likely to boost the rupee and bring down bond yields, at least in the near-term.

Click NEXT to read further. . .


Image: A vendor wipes his face at a shop selling garlands made of Indian currency notes in the old quarters of Delhi.
Photographs: Adnan Abidi/Reuters

Prev     Next

Why rupee will continue to remain weak

Prev     More
Prev

More

Raising interest rates, one of the traditional tools for defending a currency, might attract inflows but risk eroding confidence in an economy growing at a decade low of 5 per cent.

Higher interest rates could also choke off inflows into equity markets, which have been a relative bright spot.

Despite foreign exits over the past two months, Indian stocks are sitting on net inflows of $12.7 billion in 2013.

"The underlying situation is deteriorating.

"The economy is struggling to grow, there is a fiscal and current account deficits, and we are going into an electoral period," said Philip Poole, global head of macro investment strategy at HSBC Asset Management in London.

"From a fundamental point of view, the currency looks cheap, but the flows in the short term are a concern. There needs to be some consistent policy coming from the government and the central bank." ($1 = 0.7508 euros)


Image: Cycle rickshaws move past a display of Indian rupees at a roadside currency exchange stall in the old quarters of Delhi.
Photographs: Anindito Mukherjee/Reuters

Prev     More
Source:
© Copyright 2013 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.