Will rupee rise from the ashes?

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Aug 29, 2013 09:34 IST

As the rupee hit a new low of 68.80 to a dollar on Wednesday, from the man on the street to the money market professionals and policy makers, all seemed 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 come a few weeks too early.

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 anticipation that new RBI governor Raghuram G Rajan will usher in a pro-growth tilt in monetary policy, but 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.

Investors would be keenly watching for forward looking cues on Rajan’s stance in the mid-quarter credit policy review on September 18, less than a fortnight after he takes over as India’s topmost monetary officer on September 5.

“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.

In the latest set of moves, 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 set to float a first-of-its-kind a proxy sovereign bonds that will allow 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.

These, along with other actions such as easier overseas borrowing norms and more attractive returns on NRI deposits in Indian banks, is estimated to fetch the government an additional $11 billion (about R66,000 crore), crucial to strengthen the rupee that has fallen by more than 15% since May.

The measures are part of a strategy to rein in India’s current account deficit (CAD)—the difference between dollar inflows and outflows—to about 3.7% of GDP from a record 4.8% of GDP last year, but these didn’t seem to have worked.

Rajan faces the classic monetary trilemma: stablising foreign exchange rates, boosting growth and containing inflation. On Tuesday he said there was no “magic wand” to solve the immediate problems afflicting the economy.

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