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Indian rupee plunges to new record low

Posted by Haja Mohideen (Hajas) on 8/28/2013 9:16:29 AM

Indian rupee plunges to new record low
(AFP) / 28 August 2013
India’s rupee slumped nearly four percent to a fresh record low against the dollar on Wednesday as concerns about a US-led military strike against Syria compounded deepening domestic economic woes.

The rupee, one of Asia’s worst performing currency this year, has lost nearly a quarter of its value since the start of the year.

The Indian unit, which lost three percent on Tuesday, was down 2.46 per cent at 67.87 rupees to the dollar in afternoon trade after plunging 3.84 per cent at one point to 68.74 rupees.

And HDFC analyst Ashutosh Raina warned: “The flight to dollar safety is expected to intensify pressure on the rupee in the short-term.”

The benchmark Bombay Stock Exchange index also suffered a sell-off, dipping 2.89 percent at one point before recovering slightly to trade 0.51 percent lower.

Wednesday’s losses coincided with a global sell-off, with dealers seeking refuge in the dollar, perceived as a safe haven, in the face of potential turmoil in the Middle East, while crude prices have hit multi-month highs.

But other reasons for the rupee’s drop are home-made — failure to move fast enough on economic reform, a string of government corruption scandals, perceptions of policy paralysis and a record current account deficit, analysts say.

Also, the rupee, like other emerging market currencies, has been hit by foreign fund outflows, with the US Federal Reserve expected to wind down its stimulus scheme as the US economy recovers.

The Fed’s easy money programme has seen vast sums of cash pile into emerging markets in the past year as investors sought better returns than in the West. But with the Fed bond-buying, which has kept US rates subdued, seen coming to an end traders are repatriating their money.

Standard Chartered Bank forecast the rupee may hit 70 rupees to the dollar before it strengthens.

“The fall in rupee is no more (just) a country-specific issue. Emerging markets have been reeling under currency pressure with the dollar strengthening. That is going to definitely continue,” Arindam Ghosh, chief executive of BlackRidge Capital Advisors told business channel ET Now.

With investors looking for safer investments, gold prices have also surged hit an all-time high of 34,500 rupees per 10 grammes owing to strong demand caused by the Indian currency’s weakness. Indians, the world’s biggest buyers of gold, frequently purchase bullion as a hedge against inflation.

On Tuesday Finance Minister P. Chidambaram appealed for market calm and insisted India can finance a contentious $19 billion right-to-food programme for the poor and still cut its record current account deficit — the broadest measure of trade — whose level has unnerved investors.

“We have done our sums — there is enough money to provide for the food security bill” and meet the deficit target, “which is a red line that will not be breached”, Chidambaram told parliament.

India would have to be “patient, be firm — do whatever is required to be done — and the rupee will find its appropriate level”, he said.

The food bill, which economists say would strain government finances, comes at a time of sharply slower growth.

The central bank has warned increased public spending on the bill could aggravate the deficit and fuel already high inflation that will be stoked by the rupee’s fall as import prices rise.

Forex dealers also said the rupee was suffering a drag from traditionally strong month-end demand for the US currency from importers.

Analysts said further falls could be in store for Indian markets with first-quarter growth data on Friday expected to show the economy slowing further.

The once-booming economy grew five percent last year, a decade low.

To ease pressure on the rupee, the government said it had set up a panel to look at paying for imported items in rupees rather than foreign exchange under bilateral currency swap agreements.


Indian rupee in free fall

Issac John

The relentless rout of the Indian rupee continued with the currency of the Asia’s third largest economy breaching the key level of 66.00 to the dollar on Tuesday, portending that its abysmal plunge to 70 is well nigh imminent.

The rupee’s steep plunge to a new all-time low of 66.24 from 64.30 on Monday was partly on fears over a US-led military strike in Syria, which could push oil prices higher globally, even as investors became more nervous over the astronomical cost of a new move by New Delhi to provide subsidised food to millions of Indians.

The inexorable dive of the rupee did little to cheer the bewildered non-resident Indians in the Gulf who are caught in a paradoxical situation with those who remitted the money over the past few weeks ruing over their loss as the fall of the currency continued unabated.

In 10 weeks or so, the partly convertible Indian currency lost 22 per cent of its value against the dollar-pegged dirham — from just over Rs14 per dirham in May to Rs18.21 on Tuesday.

The new bout of alarm over India’s fiscal deficit in the wake of the $20 billion food security plan eclipsed an announcement by Finance Minister P. Chidambaram that the government had approved infrastructure projects worth $28.38 billion, a step aimed at reviving economic growth and shoring up investor confidence.

Despite Chidambaram’s promise on Tuesday that the government would meet its fiscal deficit target, the rupee plumbed new depths.

Monetary experts said a dismal climate of uncertainty prevails in the currency market as all efforts by the Reserve Bank of India and the Finance Ministry to generate positive sentiments to arrest the pace of the decline have misfired.

Shares also slumped, sending the benchmark BSE index down more than three per cent and benchmark 10-year bond yields up nearly 20 basis points.

“The rupee is caught in a catch-22 situation as the $20 billion Food Security Bill passed by the parliament on Tuesday to provide subsidised wheat and rice to 67 per cent of India’s population of 1.2 billion further amplified concerns over the India’s widening fiscal deficit. Foreign investors continue to exit the market fearing the prospect of a tapering off in the Federal Reserve’s stimulus, further depleting the country forex reserves amid a slowing growth,” analysts said.

The repeated assurances given by Chidambaram also did not serve to calm the nerves. “I think we’ll simply have to be patient, be firm, do whatever is required to be done, and the rupee will find its appropriate level,” Chidambaram said on Tuesday.

Y.Sudhir Kumar Shetty, COO-Global Operations, UAE Exchange, said the food security bill passed by the Indian parliament late on Monday added to the bearish sentiment and the rupee traded with weak bias despite RBI intervention at regular intervals. Market brushed aside the presence of RBI and rupee closed at a lifetime low of 66.20.

“Sentiments are still bearish and unless authorities come out with some effective measures, rupee will continue its tailspin in the coming days,” he said.

Sajith Kumar PK, director and CEO of JRG International Brokerage, said the record low of the rupee is beneficial to those NRIs who send money to settle their financial liabilities or for investment purpose. “On the other side, NRIs are also losing the value of their rupee deposits while facing the prospects of rising inflation back home.”

“However, even though rupee has lost 22 per cent against the dollar since May this year, foreign direct investors and foreign Institutional investors still see long-term investment opportunities in India based on the projects mentioned in the 12th Five Year Plan and recent enhancement of FDI investments in various sectors by the government,” said Kumar.

Pradeep Unni, senior relationship manager, Richcomm Global Services DMCC, said at the current pace of fall, another three or four rupees’ slide seems to be logical. “Rs.70 to a dollar is now becoming a reality,” he said.

“With the RBI and the government failing in every attempt to stem the slide, it is better to allow the rupee to find its own base,” said Unni.

He said despite Chidambaram’s announcement about the huge power and infrastructure projects, markets remained sceptical about India’s ability to attract enough foreign funds for the programme. “With general elections round the corner and growth faltering across all sectors, seldom will any foreign investor dare to put funds into India. Amid such gloomy outlook, if the RBI or the government tries to arrest rupee’s slide with incompetent policy actions the damage to the economy will be severe,” he said.

Fitch Ratings warned on Monday that India was finding it more challenging to meet its fiscal deficit target as revenues slow.

Although Chidambaram sought to address concerns about the economic slowdown by pledging to kick-start 36 stalled projects in sectors ranging from oil, gas and power to roads and railways. However, analysts believe that projects will not take off quickly amid mounting concerns about the country’s dismal fiscal management.

“Adding to the woes, a spillover from the Syrian conflict could push up the price of crude oil. As one of the largest importers of crude, a further price rise would widen the country’s large current-account deficit that could weigh on the Indian currency. All these factors continue to raise serious doubts about a potential ratings downgrade,” analysts pointed out.


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