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28 March 2024

Indian rupee tumbles: Closing in on Rs15@Dh1

Published
By Vicky Kapur

The US dollar – and, therefore, the dollar-pegged UAE dirham – strengthened to a two-month high against the Indian rupee as uncertainty over the US Presidential race meant that investors cashed out of their liquid rupee investments and converted them into ‘safe haven’ dollars.

The Indian rupee slumped to a two-month low of Rs14.90 against the UAE dirham in early morning trade on Tuesday as global risks played on investors’ minds this morning.

The race for the US Presidency, for which the final round of voting is scheduled for today, is being seen as a tight one, and is likely to keep up the pressure on the Indian currency.

The rupee has been on a downward spiral for quite some time now, making successive all-time lows in the months May and June, and remaining below the magical Rs15 Vs. Dh1 rate all through until early September this year.

It briefly appreciated in the second half of September after the Indian government announced some key economic reforms, but the continuing global economic uncertainty and India’s widening fiscal deficit has kept up the pressure.

The rupee hit a six-month high earlier this month, when it traded at Rs14.09 against the UAE dirham on October 8. However, the currency has since declined 5.75 per cent in four weeks, and may continue to weaken in the remainder of this week as well.

The rupee famously declined 17.5 per cent in four-and-a-half months, from Rs13.23 versus Dh1 on February 5, 2012, to Rs15.55 on June 23, 2012, much to the delight of Indian expats in the UAE and elsewhere.

Last month, in an interview with the Wall Street Journal, Indian Finance Minister P Chidambaram voiced his concerns about the Indian currency, and said that the reforms announcements were made with eye on the depreciating rupee, and that the country cannot afford to let the rupee rot any firther.

Chidambaram said his ministry will soon unveil a five-year plan for a “credible and feasible” fiscal consolidation path. “No one will have confidence in the Indian economy if there is uncertainty about the fiscal stability of the country,” Chidambaram admitted in a public forum in October.

“It is our intention to announce a credible and feasible path of fiscal correction beginning this year and ending in the fifth year of the 12th plan [which ends in March 2017],” he said.

In an interview with the Wall Street Journal, Chidambaram admitted that time was not on India’s side, and that the government knows that it has to act before the rupee slumps to 60 against the US dollar (Rs16.33 against the UAE dirham).

“When I took over in August, I came to the conclusion that we do not have the luxury of time. We cannot wait any longer,” the WSJ quoted him as saying. “The fiscal situation, the ballooning expenditure, inflation, and the slowdown of investments led me to conclude that we did not have too much time and some decisions had to be taken and announced immediately,” he said.

“Could we have waited until the day when the rupee had touched 60 to a dollar? Could we have waited for a further draw-down of foreign-exchange reserves? The answer is obviously no. And therefore we took these decisions,” Chidambaram explained the rationale behind the recent slew of reforms announced by the government after years of policy paralysis.

Chidambaram’s comments left no doubts that India is concerned not just about actual growth, but also the perception of that growth among international investors, and some of the recently announced steps may actually be to portray a reformist image of the Indian economy.

“Some rating agencies had talked about a downgrade. We believe that India does not deserve a downgrade but we take such talk seriously. Secondly, every banker and every major industrial house told me they were finding it difficult to raise capital, both in the Indian market and abroad. Thirdly, supply-side constraints were becoming more acute, and unless new investments are made, these supply-side constraints cannot be removed,” he told the WSJ.