Rupee: Base set to stay at 49

Indian rupee registered a negative annual profile for the first time since 2008, with a loss of around 16 per cent, as Europe’s debt crisis threatened to derail global economic growth in makets, including emerging ones like India, and hurt demand for financial assets in developing nations. On the face of it, India attracted Foreign Direct Investment (FDI) worth $22.52 billion between January and September, 2011, against $15.97 billion in the year-ago period. The rise in FDI inflows should have cheered the investment climate. Instead, the mood is gloomy, especially after the government was forced to put on hold the big bang policy of opening multi-brand retail to foreign investment. The FIIs withdrawal of Rs 2,500 crore last calendar year, too, has been detrimental to the rupee.

The local currency weakened the most in Asia this year, touching a record low of 54.305 per dollar on December 15, as foreign funds cut holdings of Indian stocks. India’s currency thus underperformed those among the largest emerging markets in 2011. Brazil’s Real lost 11 per cent to 1.8657 per dollar, while the Russian rouble fell 5.4 per cent to 32.2669. The Chinese Yuan appreciated 4.7 per cent to 6.2940.

The Reserve Bank of India has been intervening to curb trading and speculation —either through direct dollar sales or austerity measures by not allowing local companies enter into multiple forward contracts to cover a single overseas transaction, reducing dollar buying one side. Also, it allowed lenders to offer higher deposit rates for Indians living outside the country to attract funds lying overseas. Reducing overnight limits of banks to curb speculation and allowing hedging facilities of the NRE were also the steps taken on similar directions.

Despite these measures, no major correction has been observed in the rupee. The currency is still hovering above the levels of 53. Going ahead, it signals weaker rupee.

Additionally, the $1.7-trillion Indian economy seems to miss the central bank’s growth estimate of 7.6 per cent for the 12 months ending March 31, 2012. Inflation seems to maintain at 7.5-8 per cent for the next couple of quarters with increased deficit adding to the woes. We also witnessed increased government borrowings to a record $88.4 billion by the authorities, due to a slowdown in government revenues. We expect these targets to get revised again in the future, since the government cannot afford to cut spending, which would act as a double-edged sword and stall economic growth. Most importantly, the higher loan liability in form of (ECBs , FCCBs , buyers credit rollovers) of India Inc is also worrying the government. The finance ministry has voiced concerns over the rise in external commercial borrowings (ECBs) by companies and its debt-servicing implications. ECBs grew at 27.4 per cent between March ’06 and March ’11, while the country’s debt stock rose 6.6 per cent between March and September this year -- to $326 billion. Of this, around 22 per cent or more is short-term debt. It signals huge genuine dollar demand.

Of course, 2012 is going to be a challenging year for the euro zone. The new fiscal compact negotiated in December 2011 made no attempt to tackle the real issues — the level of debt, how to reduce it, how to meet funding requirements or how to restore growth. Most importantly, there were no new funds committed. It would face a number of challenges, including the implementation of the new institutional arrangements, possible downgrading of a number of nations, re-financing maturing debt and meeting required economic targets.

Slowing European growth, knock-on effects on the US and emerging markets like China, the deterioration in money market conditions and the withdrawal of European banks from lending in Asia will pose significant challenges for India in the year ahead. Credit rating agencies are watching!

Has the base of rupee moved from 44 to 49? Looks likely! We are looking at levels of 51.50 to 55 for the range of rupee in the next 3-6 months with a base of Rs 49 to stay. Euro to hit 1.25 and below with dollar index hitting 83. Gold moving down despite global woes and talks of central banks buying gold. Are we looking at gold below $1500 dollars?

The writer is founder and CEO, India Forex Advisors Pvt Ltd