The rupee recovered in early trading Thursday, a day after hitting a record low of 60.7 to a dollar, as data released by the Reserve Bank of India (RBI) showed the country's current account deficit narrowed through last quarter.
The RBI’s decision on Wednesday to ease rules for overseas borrowing by Indian companies and indications that the US central bank would continue with monetary stimulus also helped.
The current account deficit, the broadest measure of India’s financial transactions with the rest of the world, narrowed to $18.1 billion in January-March from $21.7 billion in the same period a year ago, the RBI said on Thursday, easing some concerns about funding of the deficit.
The rupee gained, inching up to 60.36 to a dollar in early trade. But analysts said it would take more for the rupee to find its right value and stabilise. Inflow of foreign capital and the government’s ability to curb inflation hold the key, they said.
“Return of foreign capital in the short term will critically depend on adopting the right policy mix to attract higher investment inflows and improve growth prospects of the economy," said DK Joshi, chief economist at CRISIL Research in a research report.
The rupee’s slump through recent weeks – it has lost 13% since May -- threatens to blow a bigger hole in household budgets and dashing hopes that the RBI will make loans cheaper.
A sliding rupee is toxic. For a start, it means that India needs to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation.
And high inflation means that the RBI will hesitate to cut interest rates, a step needed to boost economic growth.
So consumers need to keep paying large chunks of their income every month towards housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recedes because the economy is struggling.
“Less fruits, less biscuits, less detergent and less movies at multiplexes. We are cutting expenses where we can,” said Meenu Kaushal, a teacher who stays in Mayur Vihar in Delhi.
It's not just households. Companies that import raw materials are hurting badly, a situation certain to further hurt economic growth. Students wanting to study abroad or families who wish to go overseas for a holiday might also be forced to reconsider.
The rupee is falling because foreign investors are selling the currency, preferring instead to plough into the US market, which is showing signs of resurgence.
“The level of 62 to a dollar looks imminent in coming days and a breach might lead to a drift even towards 63-mark in near term,” said Sugandha Sachdeva, currency analyst, Religare Securities.
Amid all this, as if to tempt Indian buyers, gold prices hit a three-year low on Wednesday, falling Rs. 685 to close at Rs. 26,280 per 10gm. On Thursday, however, Gold prices charted the same course as the rupee, recovering a bit in early trade.
Finance minister P Chidambaram has warned Indians to cut down on gold consumption so as to keep the current account deficit -- the difference between dollar inflows and outflows -- under control.
This deficit may also limit the RBI's ability to prop up the rupee by dipping into its $290 billion of foreign exchange reserves, enough to cover imports for seven months.