Fundamental economic weakness and a ballooning fiscal deficit continue to weigh heavily on the Indian currency, pushing it to fresh 15-week lows at Rs14.30 versus the UAE dirham at 1.30pm UAE time (9.30am GMT) this afternoon (April 23, 2012).
The rupee on Friday broke the Rs52-mark against the US dollar for the first time since January 10, 2012, and is now seen edging towards its all-time low of Rs14.62 versus the dirham (Rs54.30 against $1), which it registered on December 15, 2011. It is currently hovering at Rs52.547 against the US dollar.
Experts maintain that, barring the unveiling of any major economic reform, the rupee will soon test all-time lows and may even decline to Rs15 versus the dirham (Rs55 against $1) within the next three months or so.
With general elections in the country slated for 2014, the ruling Congress party is unlikely to undertake any meaningful reforms since that could ruin their chances of winning a clear majority, not to mention the fact that petty politics and its current allies in power are in any case responsible for what has been dubbed as a policy paralysis in the country.
Case in point is the forced rollback in allowing foreign direct investment (FDI) in retail, announced late last year. While the government insists it’s a holdback, the opposition and Leftist government allies have already termed the ‘suspension’ of the decision to allow 51 per cent FDI in retail trade as a rollback.
Nevertheless, this week’s decline comes in the wake of India’s largest annual trade deficit in history, amounting to $185 billion for the fiscal year ended March 31, 2012, despite record exports figures of $303.7b.
High oil demand by India’s growing population, coupled with a traditional hunger for gold, were responsible for an imports bill of $488.6b, leading to a huge deficit of 9.9 per cent of the country’s GDP.
Moreover, the country’s central bank, Reserve Bank of India (RBI), announced a bigger-than-expected 50 basis points rate cut last week, its first in three years, to prop up sagging economic growth.
This move is expected to further weaken the rupee as remittances by non-resident Indians (NRIs), which surged in the initial months of 2012 on higher interest rates, will slow down, depriving Indian importers of the much-needed foreign currency to buy crude oil.
With the month of April drawing to a close this week, month-end dollar demand from oil importers is expected to keep the rupee lower despite the reported dollar sales by some foreign banks in the country.
Traders expect the RBI to intervene in the currency market around 52.50 levels against the US dollar (Rs14.29 versus the UAE dirham), but the fundamentals of a slowing economy and mounting deficits mean that any effect of the intervention will be short-lived, and that the rupee may slump below its all-time lows.