The rupee has resumed its downward journey once again. The question is not if it is going to touch its previous bottom of 53.72 against the dollar, but when will it touch it.
A slowing economy, governance lethargy and a rising current account deficit is being blamed for recent fall. Add to this a tight liquidity situation is preventing the central bank to intervene wholeheartedly to support the currency.
Economic indicators are clearly pointing towards a sustained slowdown. The current account deficit (CAD) is a problem that has somehow not raised enough sound bites as it should have. Recent data show that the country’s deficit is nearing the 4% mark as compared to a comfort zone of 2.5%. Rajeev Malik, senior economist with CLSA, in an article in Business Standard, spoke of the dangers and long term impact of such a high CAD figure.
More than the problem of rising CAD is the remedial measure used by the government. Most of the deficit is being financed by short-term volatile capital inflows. Any disruption in the global market can result is a flight of capital, thus creating a bigger problem.
Most of India’s forex reserve is on account of debt, which will have to be re-paid. A fall in the pace of FDI and a negative trade balance following a slowdown in global markets has aggravated the rupee problem.
With RBI already pumping in nearly $16 billion in the cash market and $3 billion in futures to stabilise the currency, it is naturally hesitant to pump in more. The likelihood of strengthening of oil prices can only add to the pressure on the rupee.
The sharp foreign institutional investor (FII) inflow witnessed in the first two month of the current year has also slowed down, adding to the pressure on the rupee.
Sticky inflation and high interest rates are only adding to the weak rupee.
There is no short-term solution to the problem one will have to wait it out till the overall economic scenario improves. Till then the rupee is on a straight drive to its previous low of 53.72 with a few speed breakers in between.
