Rupee near record low on scepticism about new steps

Dollar's gain against the yen put pressure on the rupee

The rupee slumped to near a record low on Tuesday on doubts about the government's latest plan to narrow the current account deficit, deepening concerns about the economy and fears of more foreign capital outflows.

India's finance minister announced a slew of measures on Monday in a bid to relieve some of the grinding pressure on the currency, focusing on curbing imports and raising money abroad.

The Indian rupee trimmed some of its initial losses against the American currency but was quoted still down by 25 paise to 61.52 per dollar on good dollar demand from banks and importers on the back of higher dollar in overseas market.

     
The rupee resumed at 61.39 per dollar as against the last closing level of 61.27 per dollar at the Interbank Foreign Exchange (Forex) Market and dropped further to 61.66 per dollar on good dollar buying.

     
However, it recovered afterwards to quote at 61.52 per dollar at 1040hrs on some dollar selling by exporters in view of firm equity market.

     
It moved in a range of 61.39-61.66 per dollar during the morning deals.

But markets were highly sceptical the steps would arrest the rupee's decline, reflecting both increasingly weak economic fundamentals and expectations of further capital outflows from emerging markets if the Federal Reserve begins scaling back its stimulus measures in September as widely expected.

 

That raises prospects that the Reserve Bank of India will need to stick to its gambit of draining cash from the financial system longer than expected, risking further strains on the economy and, in turn, making it harder to attract vital foreign inflows.

Although the government has reduced gold imports with a series of measures including raising duties, cutting oil import bills may be tougher given the weakening rupee is pushing up domestic fuel prices.

 

Imposing duties on non-essential items would also need to be carried out without breaking World Trade Organization rules.

 

Meanwhile, state-run companies would be raising money abroad in an uncertain global economic environment, and at a time when the rupee is weakening and growth remains weak.

 

For example, Indian Oil Corp , which is expected to raise $1.7 billion, last month sold 10-year dollar-denominated debt by paying about 50 basis points more over equivalent U.S. Treasuries than in its last sale in July 2011.

 

Economic data also remains discouraging. Figures on Monday showed industrial output declined a larger than expected 2.2% in June from a year earlier, hitting shares such as Larsen and Toubro Ltd on Tuesday.

 

Fears about the Fed's tapering of its monetary stimulus and the weakening rupee have also sparked strong foreign selling, especially in debt. Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May, when the rupee started its decline.

 

Even if India were to meet its target of narrowing the current account deficit to 3.7%, that would be still above what the RBI has called a sustainable deficit of 2.5% of GDP.

 

"Ultimately there is still little evidence to show a structural improvement in the current account," said Scotiabank's senior currency strategist Sacha Tihanyi in a note to clients.

 

"We continue to note that the current account deficit, at a level of even 3.7% of GDP, remains too large for India and still poses risks for the rupee."