As the rupee hit a new low of 68.85 to a dollar on Wednesday, from the man on the street to the money market professionals and policy makers all seem to have one question in mind: How far is the rupee from reaching its bottom?
Only a week ago, analysts had forecast that the rupee would
fall up to 70 against dollar in the next three months, partly mirroring the government’s and the Reserve Bank of India’s (RBI’s) inability to control a free-falling domestic currency.
That seemed to have arrived a few weeks too early.
Having cantered close Rs. 70 to a dollar, the debate now is veering around the next psychological barrier.
Analysts warned that worst may not be over yet implying you may have to brace yourself for a life of 70-plus value to dollar.
“Downward pressure on asset prices is unlikely to abate until the rupee becomes decisively cheap (maybe above 70) or the authorities deliver ‘shock and awe’ tightening,” said Richard Iley, Chief Asia Economist, BNP Paribas.
Finance minister P Chidambaram, told Parliament on Tuesday that more reforms were the answer.
He listed out ten steps including promoting of manufacturing sector and exports to boost faltering growth, which needs to be raised to its potential rate of 8%.
And he hinted at the possibility of a sovereign bond to bring in more dollars.
The rupee’s value has eroded more than 15% since July 15 – the day when RBI announced the first major string of steps to arrest the currency’s slide.
Currency markets, pretty much like other commodities, are a function of the laws of demand and supply.
Stronger demand for the currency pushes up its price and vice versa.
There is speculation that the US central bank will start unwinding its stimulus programme, which will push up interest rates at US banks.
Besides, demand for dollars have risen as portfolio investors start withdrawing money from emerging markets such as India and park funds closer home.
There are also signs of recovery in Europe and Japan that will move funds away from Indian markets pushing up demand for dollars.
Analysts warned of more pain ahead as the RBI and government move in to cool prices and prop up the currency.
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“Taming inflation or the currency (as is the case currently) may require policies that result in increasing the economic misery for people in the near term.
"Unfortunately, we see no short cuts,” said Sonal Varma, economist at Nomura.
Over the last few weeks, the government and RBI has taken a raft of measures to boost the currency including easing FDI rules, making funds costlier for banks and slapping foreign exchange controls on individuals and firms.
There is bated anticipation that new RBI governor Raghuram G Rajan will usher in a pro-growth tilt in India’s monetary policy.
However, analysts are of the view that there is little that the new central bank chief can do differently from his predecessor to steer the economy caught in a pincer attack of a falling rupee, sliding growth and high inflation.
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“The most important problem that the RBI governor will have to address is that of managing the current account deficit (CAD).
It’s a far deeper structural problem of which the falling rupee is a symptom,” said a senior policy maker, who did not wish to be identified.
The government has hiked import duty on gold to make you bear the cost of a creaking foreign exchange deficit and stabilise a weakening rupee.
India is also set to float a first-of-its-kind a proxy sovereign bonds that will allow the government-owned companies to dig deep into the pockets of foreign pension and institutional funds to stem the rupee’s slide, raise funds for building highways and also test international investors’ confidence in the economy that has been the target of unsparing criticism of global credit rating firms.
Graphic: 5 steps to save the rupee
But analysts said that more urgent measures were required to arrest the fall.
“An emergency package of measures that includes modest tax increases like excise duties and reduced current account spending combined with long promised legislative action on further FDI liberalisation (insurance and pensions) and the land acquisition bill would fit the bill,” said Iley.
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